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Where does money come from? Where does it go? Who 
makes it? The money magicians' secrets are unveiled. Here is a 
close look at their mirrors and smoke machines, the pulleys, 
cogs, and wheels that create the grand illusion called money. 

A boring subject? Just wait' You'll be hooked in five 
minutes. Reads like a detective story - which it really is. But if s 
all true. This book is about the most blatant scam of history. If s 
all here: the cause of wars, boom-bust cycles, inflation, depres- 
sion, prosperity. Your world view will definitely change. 

Putting it quite simply: this may be the most important 
book on world affairs you will ever read. 

"A superb analysis deserving serious attention by all 
Americans. Be prepared for one heck of a journey through time 
and mind." 

Ron Paul, member of Congress 
House Banking Committee 

"What every American needs to know about central bank 

power. A gripping adventure into the secret world of the 

international banking cartel." 

Mark Thornton, Asst. Professor of Economics, 
Auburn University; Coordinator Academic Affairs, 
Ludwig von Mises Institute 

"A magnificent accomplishment - a train-load of heavy history, 
organized so well and written in such a relaxed and easy style 
that it captivated me. I hated to put it down." 
Dan Smoot 

Publisher/Editor, Dan Smoot Report 

"As a career banker and president of a bank consulting firm, I 
thought I had a good understanding of the Federal Reserve. But 
this book changed the way I view our entire monetary system." 

Marilyn MacGruder Barn wall 

Grand Junction, Colorado 


Thick books can be intimidating. We tend to put 
off reading them until we have a suitably large 
block of time — which is to say, often they are 
never read. That is the reason a preview has been 
placed at the beginning and a summary at the end 
of each chapter. All of these together can be read 
in about one hour. Although they will not contain 
details nor documentation, they will cover the 
major points and will provide an overview of the 
complete story. The best way to read this book, 
therefore, is to begin with the previews of each 
section, followed by the chapter previews and 
summaries. Even if the reader is not in a hurry, 
this is still an excellent approach. A look at the 
map before the journey makes it easier to grapple 
with a topic such as this which spans so much 



A Second Look at the 
Federal Reserve 

Third edition 

by G. Edward Griffin 

American Media 

Dedicated to the next generation-especially my own brood: 
James, Daniel, Ralph, and Kathleen. 
May this effort help to build for them a better world. 

Seventh printing: May 1998 
Sixth printing: September 1997 

Fifth printing: August 1996 
Fourth printing: September 1995 

Third printing: April 1995 
Second printing: November 1994 
First printing: July 1994 

Third edition: May 1998 
Second edition: September 1995 
First edition: July 1994 

© Copyright 1998,1995 and 1994 by G. Edward Griffin 

Published by American Media 
P.O. Box 4646 
Westlake Village, California 91359-1646 

Library of Congress Catalog Card Number: 98-71615 
ISBN 0-912986-21-2 
Manufactured in the United States 


Preface i 

Acknowledgments iv 

Introduction v 


What is the Federal Reserve System? The answer may 
surprise you. It is not federal and there are no reserves. 
Furthermore, the Federal Reserve Banks are not even banks. The 
key to this riddle is to be found, not at the beginning of the story, 
but in the middle. Since this is not a textbook, we are not 
confined to a chronological structure. The subject matter is not a 
curriculum to be mastered but a mystery to be solved. So let us 

start where the action is. 

1. The Journey to Jekyll Island 3 

2. The Name of the Game Is Bailout 25 

3. Protectors of the Public 41 

4. Home Sweet Loan 67 

5. Nearer to the Heart's Desire .85 

6. Building the New World Order .107 


The eight chapters contained in this and the following 
section deal with material that is organized by topic, not 
chronology. Several of them will jump ahead of events that are 
not covered until later. Furthermore, the scope is such that the 
reader may wonder what, if any, is the connection with the 
Federal Reserve System. Please be patient. The importance will 
eventually become clear. It is the author's intent to cover 
concepts and principles before looking at events. Without this 
background, the history of the Federal Reserve is boring. With it, 
the story emerges as an exciting drama which profoundly affects 
our lives today. So let us begin this adventure with a few 
discoveries about the nature of money itself. 

7. The Barbaric Metal .135 

8. Fool's Gold 155 

9. The Secret Science .171 

10. The Mandrake Mechanism 185 


The ancient alchemists sought in vain to convert lead into 
gold. Modern alchemists have succeeded in that quest. The lead 
bullets of war have yielded an endless source of gold for those 
magicians who control the Mandrake Mechanism. The startling 
fact emerges that, without the ability to create fiat money, most 
modern wars simply would not have occurred. As long as the 
Mechanism is allowed to function, future wars are inevitable. 

This is the story of how that came to pass. 

11. The Rothschild Formula 217 

12. Sink the Lusitania! 235 

13. Masquerade in Moscow 263 

14. The Best Enemy Money Can Buy 285 


It has been said that those who are ignorant of history are 
doomed to repeat its mistakes. It may come as a surprise to learn 
that the Federal Reserve System is America's fourth central 
bank, not its first. We have been through all this before and, each 
time, the result has been the same. Interested in what happened? 
Then let's set the coordinates of our time machine to the colony 
of Massachusetts and the year 1690. To activate, turn to chapter 


15. The Lost Treasure Map 309 

16. The Creature Comes to America 325 

17. A Den of Vipers 341 

18. Loaves and Fishes, and Civil War 361 

19. Greenbacks and Other Crimes 377 


Monetary and political scientists continue to expound the 
theoretical merits of the Federal Reserve System. It has become a 
modern act of faith that economic life simply could not go on 
without it. But the time for theory is past. The Creature moved 
into its final lair in 1913 and has snorted and thrashed about the 
landscape ever since. If we wish to know if it is a creature of 
service or a beast of prey, we merely have to look at what it has 
done. And, after the test of all those years, we can be sure that 
what it has done, it will continue to do. Or, to use the Biblical 
axiom, a tree shall be known by the fruit it bears. Let us now 
examine the harvest. 


20. The London Connection .407 

21. Competition Is A Sin .431 

22. The Creature Swallows Congress 451 

23. The Great Duck Dinner 471 


In the previous sections of this book, we have travelled 
through time. We began our journey by stepping into the past. 
As we crisscrossed the centuries, we observed wars, treachery, 
profiteering, and political deception. That has brought us to the 
present. Now we are prepared to ride our time machine into the 
future. It will be a hair-raising trip, and much of what lies ahead 
will be unpleasant. But it has not yet come to pass. It is merely 
the projection of present forces. If we do not like what we see, 
we still have an opportunity to change those forces. The future 

will be what we choose to make it. 

24. Doomsday Mechanisms .507 

25. A Pessimistic Scenario .537 

26. A Realistic Scenario .565 


The seven men who met in secret at Jekyll Island 24 

The Fabian Society stained-glass window 106 

First photo section 208-214 

Period cartoons about the Rothschilds 234 

Items relating to the sinking of the Lusitania 262 

Second photo section 396-404 


A. Structure and Function of the Federal Reserve 590 

B. Natural Laws of Human Behavior in Economics 592 

C. Is Ml Subtractive or Accumulative? 594 

INDEX 602 


Does the world really need another book on the Federal 
Reserve System? 

I have struggled with that question for several years. My 
own library is mute testimony to the fact that there has been no 
shortage of writers willing to set off into the dark forest to do 
battle with the evil dragon. But, for the most part, their books 
have been ignored by the mainstream, and the giant snorter 
remains undaunted in his lair. There seemed to be little reason to 
think that I could succeed where so many others have failed. 

Yet, the idea was haunting. There was no doubt in my mind 
that the Federal Reserve is one of the most dangerous creatures 
ever to stalk our land. Furthermore, as my probing brought me 
into contact with more and more hard data, I came to realize that 
I was investigating one of the greatest "who-dunits" of history. 
And, to make matters worse, I discovered who did it. 

Someone has to get this story through to the public. The 
problem, however, is that the public doesn't want to hear it. After 
all, this is bad news, and we certainly get enough of that as it is. 

Another obstacle to communication is that this tale truly is 
incredible, which means unbelievable. The magnitude by which 
reality deviates from the accepted myth is so great that, for most 
people, it simply is beyond credibility. Anyone carrying this 
message is immediately suspected of paranoia. Who will listen 
to a madman? 

And, finally, there is the subject matter itself. It can become 
pretty complex. Well, at least that's how it seems at first. 
Treatises on this topic often read like curriculum textbooks for 
banking and finance. It is easy to become ensnared in a sticky 
web of terminology and abstractions. Only monetary profession- 
als are motivated to master the new language, and even they 
often find themselves in serious disagreement. For example, in a 
recent letter circulated by a group of monetary experts who, for 
years, have conducted an ongoing exchange of ideas regarding 
monetary reform, the editor said: "It is frustrating that we 
cannot find more agreement among ourselves on this vital issue. 
We seem to differ so much on definitions and on, really, an 


unbiased, frank, honest, correct understanding of just how our 
current monetary system does function." 

So why am I now making my own charge into the dragon's 
teeth? It's because I believe there is a definite change in the wind 
of public attitude. As the gathering economic storm draws 
nearer, more and more people will tune into the weather 
report — even if it is bad news. Furthermore, the evidence of the 
truth of this story is now so overpowering that I trust my readers 
will have no choice but to accept it, all questions of sanity aside. 
If the village idiot says the bell has fallen from the steeple and 
comes dragging the bell behind him, well,... 

Lastly, I have discovered that this subject is not as compli- 
cated as it first appeared to be, and I am resolved to avoid the 
pitfall of trodding the usual convoluted path. What follows, 
therefore, will be the story of a crime, not a course on criminol- 
It was intended that this book would be half its present size 
and be completed in about one year. From the beginning, 
however, it took on a life force of its own, and I became but a 
servant to its will. It refused to stay within the confines 
prescribed and, like the genie released from its bottle, grew to 
enormous size. When the job was done and it was possible to 
assess the entire manuscript, I was surprised to realize that four 
books had been written instead of one. 

First, there is a crash course on money, the basics of banking 
and currency. Without that, it would be impossible to under- 
stand the fraud that now passes for acceptable practice within 
the banking system. 

Second, there is a book on how the world's central banks — 
the Federal Reserve being one of them — are catalysts for war. 
That is what puts real fire into the subject, because it shows that 
we are dealing, not with mere money, but with blood, human 
suffering, and freedom itself. 

Third, there is a history of central banking in America. That 
is essential to a realization that the concept behind the Federal 
Reserve was tried three times before in America. We need to 
know that and especially need to know why those institutions 
were eventually junked. 

Finally, there is an analysis of the Federal Reserve itself and 
its dismal record since 1913. This is probably the least important 
part of all, but it is the reason we are here. It is the least 
important, not because the subject lacks significance, but 


because it has been written before by writers far more qualified 
and more skilled than I. As mentioned previously, however, 
those volumes generally have remained unread except by 
technical historians, and the Creature has continued to dine 
upon its hapless victims. 

There are seven discernible threads that are woven through- 
out the fabric of this study. They represent the reasons for 
abolition of the Federal Reserve System. When stated in their 
purest form, without embellishment or explanation, they sound 
absurd to the casual observer. It is the purpose of this book, 
however, to show that these statements are all-too-easy to 

The Federal Reserve System should be abolished for the 
following reasons: 

• It is incapable of accomplishing its stated objectives. 
(Chapter 1.) 

• It is a cartel operating against the public interest. (Chapter 3.) 

• It is the supreme instrument of usury. (Chapter 10.) 

• It generates our most unfair tax. (Chapter 10.) 

• It encourages war. (Chapter 14.) 

• It destabilizes the economy. (Chapter 23.) 

• It is an instrument of totalitarianism. (Chapters 5 and 26.) 
This is a story about limitless money and hidden global 

power. The good news is that it is as fascinating as any work of 
fiction could be, and this, I trust, will add both pleasure and 
excitement to the learning process. 

The bad news is that every detail of what follows is true. 

G. Edward Griffin 



A writer who steals the work of another is called a plagiarist. 
One who takes from the works of many is called a researcher. That 
is a roundabout way of saying I am deeply indebted to the efforts of 
so many who have previously grappled this topic. It is impossible 
to acknowledge them except in footnote and bibliography. Without 
the cumulative product of their efforts, it would have taken a 
lifetime to pull together the material you are about to read. 

In addition to the historical facts, however, there are numerous 
concepts which, to the best of my knowledge, are not to be found in 
prior literature. Primary among these are the formulation of certain 
"natural laws" which, it seemed to me, were too important to leave 
buried beneath the factual data. You will easily recognize these and 
other editorial expressions as the singular product of my own 
perceptions for which no one else can be held responsible. 

I would like to give special thanks to Myril Creer and Jim Toft 
for having first invited me to give a lecture on this subject and, thus, 
forcing me to delve into it at some depth; and to Herb Joiner for 
encouraging me, after the speech, to "take it on the road." This 
book is the end result of a seven-year journey that began with those 
first steps. Wayne C. Rickert deserves a special medal for his 
financial support to get the project started and for his incredible 
patience while it crawled toward completion. Thanks to Bill Jasper 
for providing copies of numerous hard-to-locate documents. 
Thanks, also, to Linda Perlstein and Melinda Wiman for keeping 
my business enterprises functioning during my preoccupation with 
this project. And a very personal thanks to my wife, Patricia, for 
putting up with my periods of long absence while completing the 
manuscript, for meticulous proofreading, and for a most perceptive 
critique of its development along the way. 

Finally, I would like to acknowledge those readers of the first 
three printings who have assisted in the refinement of this work. 
Because of their efforts most of the inevitable errata have been 
corrected for the second edition. Even so, it would be foolhardy to 
think that there are no more errors within the following pages. I 
have tried to be meticulous with even the smallest detail, but one 
cannot harvest such a huge crop without dropping a few seeds. 
Therefore, corrections and suggestions from new readers are sin- 
cerely invited. In my supreme optimism, I would like to think that 
they will be incorporated into future editions of this book. 



The following exchange was published in the British humor 
magazine, Punch, on April 3, 1957. It is reprinted here as an 
appropriate introduction and as a mental exercise to limber the 
mind for the material contained in this book. 

Q. What are banks for? 

A. To make money. 

Q. For the customers? 

A. For the banks. 

Q. Why doesn't bank advertis- 
ing mention this? 

A. It would not be in good taste. 
But it is mentioned by implica- 
tion in references to reserves of 
$249,000,000 or thereabouts. 
That is the money that they have 

Q. Out of the customers? 
A. I suppose so. 

Q. They also mention Assets of 
$500,000,000 or thereabouts. 
Have they made that too? 

A. Not exactly. That is the 
money they use to make money. 

Q. I see. And they keep it in a 
safe somewhere? 

A. Not at all. They lend it to 

Q. Then they haven't got it? 
A. No. 

Q. Then how is it Assets? 

A. They maintain that it would 
be if they got it back. 

Q. But they must have some 
money in a safe somewhere? 

A. Yes, usually $500,000,000 or 
thereabouts. This is called 

Q. But if they've got it, how can 
they be liable for it? 

A. Because it isn't theirs. 

Q. Then why do they have it? 

A. It has been lent to them by 

Q. You mean customers lend 
banks money? 

A. In effect. They put money 
into their accounts, so it is really 
lent to the banks. 

Q. And what do the banks do 
with it? 

A. Lend it to other customers. 

Q. But you said that money they 
lent to other people was Assets? 

A. Yes. 

Q. Then Assets and Liabilities 
must be the same thing? 

A. You can't really say that. 

Q. But you've just said it. If I put 
$100 into my account the bank is 
liable to have to pay it back, so 
it's Liabilities. But they go and 
lend it to someone else, and he is 
liable to have to pay it back, so 
it's Assets. It's the same $100, 
isn't it? 

A. Yes. But... 


Q. Then it cancels out. It means, 
doesn't it, that banks haven't 
really any money at all? 

A. Theoretically.... 

Q. Never mind theoretically. 
And if they haven't any money, 
where do they get their 
Reserves of $249,000,000 or 

A. I told you. That is the money 
they have made. 

Q. How? 

A. Well, when they lend your 
$100 to someone they charge 
him interest. 

Q. How much? 

A. It depends on the Bank Rate. 
Say five and a-half per cent. 
That's their profit. 

Q. Why isn't it my profit? Isn't it 
my money? 

A. It's the theory of banking 
practice that... 

Q. When I lend them my $100 
why don't I charge them inter- 

A. You do. 

Q. You don't say. How much? 

A. It depends on the Bank Rate. 
Say half a per cent. 

Q. Grasping of me, rather? 

A. But that's only if you're not 
going to draw the money out 

Q. But of course, I'm going to 
draw it out again. If I hadn't 
wanted to draw it out again I 
could have buried it in the gar- 
den, couldn't I? 

A. They wouldn't like you to 
draw it out again. 

Q. Why not? If I keep it there 
you say it's a Liability. Wouldn't 
they be glad if I reduced their 
Liabilities by removing it? 

A. No. Because if you remove it 
they can't lend it to anyone else. 

Q. But if I wanted to remove it 
they'd have to let me? 

A. Certainly. 

Q. But suppose they've already 
lent it to another customer? 

A. Then they'll let you have 
someone else's money. 

Q. But suppose he wants his too 
... and they've let me have it? 

A. You're being purposely ob- 

Q. I think I'm being acute. What 
if everyone wanted their money 
at once? 

A. It's the theory of banking 
practice that they never would. 

Q. So what banks bank on is not 
having to meet their commit- 

A. I wouldn't say that. 

Q. Naturally. Well, if there's 
nothing else you think you can 
tell me...? 

A. Quite so. Now you can go off 
and open a banking account. 

Q. Just one last question. 

A. Of course. 

Q. Wouldn't I do better to go off 
and open up a bank? 


Section I 


What is the Federal Reserve System? The answer 
may surprise you. It is not federal and there are 
no reserves. Furthermore, the Federal Reserve 
Banks are not even banks. The key to this riddle is 
to be found, not at the beginning of the story, but 
in the middle. Since this is not a textbook, we are 
not confined to a chronological structure. The 
subject matter is not a curriculum to be mastered 
but a mystery to be solved. So let us start where 
the action is. 

Chapter One 


The secret meeting on Jekyll Island in Georgia at 
which the Federal Reserve was conceived; the 
birth of a banking cartel to protect its members 
from competition; the strategy of how to convince 
Congress and the public that this cartel was an 
agency of the United States government. 

The New Jersey railway station was bitterly cold that night. 
Flurries of the year's first snow swirled around street lights. 
November wind rattled roof panels above the track shed and gave 
a long, mournful sound among the rafters. 

It was approaching ten PM, and the station was nearly empty 
except for a few passengers scurrying to board the last Southbound 
of the day. The rail equipment was typical for that year of 1910, 
mostly chair cars that converted into sleepers with cramped upper 
and lower berths. For those with limited funds, coach cars were 
coupled to the front. They would take the brunt of the engine's 
noise and smoke that, somehow, always managed to seep through 
unseen cracks. A dining car was placed between the sections as a 
subtle barrier between the two classes of travelers. By today's 
standards, the environment was drab. Chairs and mattresses were 
hard. Surfaces were metal or scarred wood. Colors were dark green 
and gray. 

In their hurry to board the train and escape the chill of the 
wind, few passengers noticed the activity at the far end of the 
platform. At a gate seldom used at this hour of the night was a 
spectacular sight. Nudged against the end-rail bumper was a long 
car that caused those few who saw it to stop and stare. Its gleaming 
black paint was accented with polished brass hand rails, knobs, 
frames, and filigrees. The shades were drawn, but through the open 
door, one could see mahogany paneling, velvet drapes, plush 


armchairs, and a well stocked bar. Porters with white serving coats 
were busying themselves with routine chores. And there was the 
distinct aroma of expensive cigars. Other cars in the station bore 
numbers on each end to distinguish them from their dull brothers. 
But numbers were not needed for this beauty. On the center of each 
side was a small plaque bearing but a single word: ALDRICH. 

The name of Nelson Aldrich, senator from Rhode Island, was 
well known even in New Jersey. By 1910, he was one of the most 
powerful men in Washington, D.C., and his private railway car 
often was seen at the New York and New Jersey rail terminals 
during frequent trips to Wall Street. Aldrich was far more than a 
senator. He was considered to be the political spokesman for big 
business. As an investment associate of J.P. Morgan, he had 
extensive holdings in banking, manufacturing, and public utilities. 
His son-in-law was John D. Rockefeller, Jr. Sixty years later, his 
grandson, Nelson Aldrich Rockefeller, would become Vice- 
President of the United States. 

When Aldrich arrived at the station, there was no doubt he was 
the commander of the private car. Wearing a long, fur-collared 
coat, a silk top hat, and carrying a silver-tipped walking stick, he 
strode briskly down the platform with his private secretary, 
Shelton, and a cluster of porters behind them hauling assorted 
trunks and cases. 

No sooner had the Senator boarded his car when several more 
passengers arrived with similar collections of luggage. The last 
man appeared just moments before the final "aaall aboarrrd." He 
was carrying a shotgun case. 

While Aldrich was easily recognized by most of the travelers 
who saw him stride through the station, the other faces were not 
familiar. These strangers had been instructed to arrive separately, 
to avoid reporters, and, should they meet inside the station, to 
pretend they did not know each other. After boarding the train, 
they had been told to use first names only so as not to reveal each 
other's identity. As a result of these precautions, not even the 
private-car porters and servants knew the names of these guests. 

Back at the main gate, there was a double blast from the 
engine's whistle. Suddenly, the gentle sensation of motion; the 
excitement of a journey begun. But, no sooner had the train cleared 
the platform when it shuttered to a stop. Then, to everyone's 
surprise, it reversed direction and began moving toward the station 



again. Had they forgotten something? Was there a problem with 
the engine? 

A sudden lurch and the slam of couplers gave the answer. They 
had picked up another car at the end of the train. Possibly the mail 
car? In an instant the forward motion was resumed, and all 
thoughts returned to the trip ahead and to the minimal comforts of 
the accommodations. 

And so, as the passengers drifted off to sleep that night to the 
rhythmic clicking of steel wheels against rail, little did they dream 
that, riding in the car at the end of their train, were seven men who 
represented an estimated one-fourth of the total wealth of the entire 

This was the roster of the Aldrich car that night: 

1. Nelson W. Aldrich, Republican "whip" in the Senate, Chairman 

of the National Monetary Commission, business associate of J.P. 
Morgan, father-in-law to John D. Rockefeller, Jr.; 

2. Abraham Piatt Andrew, Assistant Secretary of the United States 


3. Frank A. Vanderlip, president of the National City Bank of New 

York, the most powerful of the banks at that time, representing 
William Rockefeller and the international investment banking 
house of Kuhn, Loeb & Company; 

4. Henry P. Davison, senior partner of the J.P. Morgan Company; 

5. Charles D. Norton, president of J.P. Morgan's First National Bank 

of New York; 

6. Benjamin Strong, head of J.P. Morgan's Bankers Trust Company; 


7. Paul M. Warburg, a partner in Kuhn, Loeb & Company, a 

representative of the Rothschild banking dynasty in England 
and France, and brother to Max Warburg who was head of the 
Warburg banking consortium in Germany and the Netherlands. 

1. In private correspondence between the author and Andrew L. Gray, the Grand 
Nephew of Abraham P. Andrew, Mr. Gray claims that Strong was not in 
attendance. On the other hand, Frank Vanderlip — who was there — says in his 
memoirs that he was. How could Vanderlip be wrong? Gray's response: "He was 
in his late seventies when he wrote the book and the essay in question.... Perhaps 
the wish was father to the thought." If Vanderlip truly was in error, it was perhaps 
not so significant after all because, as Gray admits: "Strong would have been among 
those few to be let in on the secret." In the absence of further confirmation to the 
contrary, we are compelled to accept Vanderlip 's account. 




Centralization of control over financial resources was far 
advanced by 1910. In the United States, there were two main focal 
points of this control: the Morgan group and the Rockefeller group. 
Within each orbit was a maze of commercial banks, acceptance 
banks, and investment firms. In Europe, the same process had 
proceeded even further and had coalesced into the Rothschild 
group and the Warburg group. An article appeared in the Nezv York 
Times on May 3, 1931, commenting on the death of George Baker, 
one of Morgan's closest associates. It said: "One-sixth of the total 
wealth of the world was represented by members of the Jekyll 
Island Club." The reference was only to those in the Morgan group, 
(members of the Jekyll Island Club). It did not include the 
Rockefeller group or the European financiers. When all of these are 
combined, the previous estimate that one-fourth of the world's 
wealth was represented by these groups is probably conservative. 

In 1913, the year that the Federal Reserve Act became law, a 
subcommittee of the House Committee on Currency and Banking, 
under the chairmanship of Arsene Pujo of Louisiana, completed its 
investigation into the concentration of financial power in the 
United States. Pujo was considered to be a spokesman for the oil 
interests, part of the very group under investigation, and did 
everything possible to sabotage the hearings. In spite of his efforts, 
however, the final report of the committee at large was devastating: 

Your committee is satisfied from the proofs submitted ... that 
there is an established and well defined identity and community of 
interest between a few leaders of finance ... which has resulted in great 
and rapidly growing concentration of the control of money and credit 
in the hands of these few men.... 

Under our system of issuing and distributing corporate securities 
the investing public does not buy directly from the corporation. The 
securities travel from the issuing house through middlemen to the 
investor. It is only the great banks or bankers with access to the 
mainsprings of the concentrated resources made up of other people's 
money, in the banks, trust companies, and life insurance companies, 
and with control of the machinery for creating markets and 
distributing securities, who have had the power to underwrite or 
guarantee the sale of large-scale security issues. The men who through 
their control over the funds of our railroad and industrial companies 
are able to direct where such funds shall be kept, and thus to create 
these great reservoirs of the people's money are the ones who are in a 



position to tap those reservoirs for the ventures in which they are 
interested and to prevent their being tapped for purposes which they 
do not approve.... 

When we consider, also, in this connection that into these 
reservoirs of money and credit there flow a large part of the reserves of 
the banks of the country, that they are also the agents and 
correspondents of the out-of-town banks in the loaning of their 
surplus funds in the only public money market of the country, and 
that a small group of men and their partners and associates have now 
further strengthened their hold upon the resources of these 
institutions by acquiring large stock holdings therein, by 
representation on their boards and through valuable patronage, we 
begin to realize something of the extent to which this practical and 
effective domination and control over our greatest financial, railroad 
and industrial corporations has developed, largely within the past five 
years, and that it is fraught with peril to the welfare of the country. 1 

Such was the nature of the wealth and power represented by 
those seven men who gathered in secret that night and travelled in 
the luxury of Senator Aldrich's private car. 


As the train neared its destination of Raleigh, North Carolina, 
the next afternoon, it slowed and then stopped in the switching 
yard just outside the station terminal. Quickly, the crew threw a 
switch, and the engine nudged the last car onto a siding where, just 
as quickly, it was uncoupled and left behind. When passengers 
stepped onto the platform at the terminal a few moments later, 
their train appeared exactly as it had been when they boarded. 
They could not know that their travelling companions for the night, 
at that very instant, were joining still another train which, within 
the hour, would depart Southbound once again. 

The elite group of financiers was embarked on a thousand-mile 
journey that led them to Atlanta, then to Savannah and, finally, to 
the small town of Brunswick, Georgia. At first, it would seem that 
Brunswick was an unlikely destination. Located on the Atlantic 
seaboard, it was primarily a fishing village with a small but lively 
port for cotton and lumber. It had a population of only a few 
thousand people. But, by that time, the Sea Islands that sheltered 

1- Herman E. Krooss, ed.. Documentary History of Currency and Banking in the United 
States (New York: Chelsea House, 1983), Vol. Ill, "Final Report from the Pujo 
Committee, February 28,1913," pp. 222-24. 



the coast from South Carolina to Florida already had become 
popular as winter resorts for the very wealthy. One such island, just 
off the coast of Brunswick, had recently been purchased by J.P. 
Morgan and several of his business associates, and it was here that 
they came in the fall and winter to hunt ducks or deer and to escape 
the rigors of cold weather in the North. It was called Jekyll Island. 

When the Aldrich car was uncoupled onto a siding at the small 
Brunswick station, it was, indeed, conspicuous. Word travelled 
quickly to the office of the town's weekly newspaper. While the 
group was waiting to be transferred to the dock, several people 
from the paper approached and began asking questions. Who were 
Mr. Aldrich s guests? Why were they here? Was there anything 
special happening? Mr. Davison, who was one of the oWners of 
Jekyll Island and who was well known to the local paper, told them 
that these were merely personal friends and that they had come for 
the simple amusement of duck hunting. Satisfied that there was no 
real news in the event, the reporters returned to their office. 

Even after arrival at the remote island lodge, the secrecy 
continued. For nine days the rule for first-names-only remained in 
effect. Full-time caretakers and servants had been given vacation, 
and an entirely new, carefully screened staff was brought in for the 
occasion. This was done to make absolutely sure that none of the 
servants might recognize by sight the identities of these guests. It is 
difficult to imagine any event in history— including preparation for 
war —that was shielded from public view with greater mystery and 

The purpose of this meeting on Jekyll Island was not to hunt 
ducks. Simply stated, it was to come to an agreement on the 
structure and operation of a banking cartel. The goal of the cartel, 
as is true with all of them, was to maximize profits by minimizing 
competition between members, to make it difficult for new com- 
petitors to enter the field, and to utilize the police power of 
government to enforce the cartel agreement. In more specific terms, 
the purpose and, indeed, the actual outcome of this meeting was to 
create the blueprint for the Federal Reserve System. 


For many years after the event, educators, commentators, and 
historians denied that the Jekyll Island meeting ever took place. 
Even now, the accepted view is that the meeting was relatively 



unimportant, and only paranoid unsophisticates would try to make 
anything out of it. Ron Chernow writes: "The Jekyll Island meeting 
would be the fountain of a thousand conspiracy theories." Little 
by little, however, the story has been pieced together in amazing 
detail, and it has come directly or indirectly from those who 
actually were there. Furthermore, if what they say about their own 
purposes and actions does not constitute a classic conspiracy, then 
there is little meaning to that word. 

The first leak regarding this meeting found its way into print in 
1916. It appeared in Leslie's Weekly and was written by a young 
financial reporter by the name of B.C. Forbes, who later founded 
Forbes Magazine. The article was primarily in praise of Paul 
Warburg, and it is likely that Warburg let the story out during 
conversations with the writer. At any rate, the opening paragraph 
contained a dramatic but highly accurate summary of both the 
nature and purpose of the meeting: 

Picture a party of the nation's greatest bankers stealing out of New 
York on a private railroad car under cover of darkness, stealthily 
hieing hundreds of miles South, embarking on a mysterious launch, 
sneaking on to an island deserted by all but a few servants, living there 
a full week under such rigid secrecy that the names of not one of them 
was once mentioned lest the servants learn the identity and disclose to 
the world this strangest, most secret expedition in the history of 
American finance. 

I am not romancing. I am giving to the world, for the first time, the 
real story of how the famous Aldrich currency report, the foundation 
of our new currency system, was written. 

In 1930, Paul Warburg wrote a massive book — 1750 pages in 
all — entitled The Federal Reserve System, Its Origin and Growth. In this 
tome, he described the meeting and its purpose but did not 
mention either location or the names of those who attended. But 
he did say: "The results of the conference were entirely confiden- 
tial. Even the fact there had been a meeting was not permitted to 
become public." Then, in a footnote he added: "Though eighteen 
years have since gone by, I do not feel free to give a description of 

1. Ron Chernow, The House of Morgan: An American Banking Dynasty and the Rise of 
Modem Finance (New York: Atlantic Monthly Press, 1990), p. 129. 

2. "Men Who Are Making America/' by B.C. Forbes, Leslie's Weekly, October 19, 
1916, p. 423. 


this most interesting conference concerning which Senator Aldrich 
pledged all participants to secrecy." 1 

An interesting insight to Paul Warburg's attendance at the 
Jekyll Island meeting came thirty-four years later, in a book written 
by his son, James. James had been appointed by F.D.R. as Director 
of the Budget and, during World War II, as head of the Office of 
War Information. In his book he described how his father, who 
didn't know one end of a gun from the other, borrowed a shotgun 
from a friend and carried it with him to the train to disguise himself 
as a duck hunter. 2 

This part of the story was corroborated in the official biography 
of Senator Aldrich, written by Nathaniel Wright Stephenson: 

In the autumn of 1910, six men [in addition to Aldrich] went out to 
shoot ducks. That is to say, they told the world that was their purpose. 
Mr. Warburg, who was of the number, gives an amusing account of his 
feelings when he boarded a private car in Jersey City, bringing with 
him all the accoutrements of a duck shooter. The joke was in the fact 
that he had never shot a duck in his life and had no intention of 
shooting any.... The duck shoot was a blind. 3 

Stephenson continues with a description of the encounter at 
Brunswick station. He tells us that, shortly after they arrived, the 
station master walked into the private car and shocked them by his 
apparent knowledge of the identities of everyone on board. To 
make matters even worse, he said that a group of reporters were 
waiting outside. Davison took charge. "Come outside, old man," he 
said, "and I will tell you a story." No one claims to know what story 
was told standing on the railroad ties that morning, but a few 
moments later Davison returned with a broad smile on his face. 
"It's all right," he said reassuringly. "They won't give us away." 

Stephenson continues: "The rest is silence. The reporters dis- 
persed, and the secret of the strange journey was not divulged. No 
one asked him how he managed it and he did not volunteer the 

1. Paul Warburg, The Federal Reserve System: Its Origin and Growth (New York- 
Macmil an, 1930), Vol. I, p. 58. It is apparent that Warburg wrote this line two years 
before the book was published. 

2. James Warburg, The Long Road Home (New York: Doubleday, 1964) p 29 

3. Nathaniel Wright Stephenson, Nelson W. Aldrich in American Politics\New York- 
Scnbners, 1930; rpt. New York: Kennikat Press, 1971), p. 373. 

4. Stephenson, p. 376. 



In the February 9, 1935, issue of the Saturday Evening Post, an 
article appeared written by Frank Vanderlip. In it he said: 

Despite my views about the value to society of greater publicity 
for the affairs of corporations, there was an occasion, near the close of 
1910, when I was as secretive — indeed, as furtive — as any 
conspirator.... I do not feel it is any exaggeration to speak of our secret 
expedition to Jekyll Island as the occasion of the actual conception of 
what eventually became the Federal Reserve System.... 

We were told to leave our last names behind us. We were told, 
further, that we should avoid dining together on the night of our 
departure. We were instructed to come one at a time and as 
unobtrusively as possible to the railroad terminal on the New Jersey 
littoral of the Hudson, where Senator Aldrich's private car would be in 
readiness, attached to the rear end of a train for the South.... 

Once aboard the private car we began to observe the taboo that 
had been fixed on last names. We addressed one another as "Ben," 
"Paul," "Nelson," "Abe" -it is Abraham Piatt Andrew. Davison and I 
adopted even deeper disguises, abandoning our first names. On the 
theory that we were always right, he became Wilbur and I became 
Orville, after those two aviation pioneers, the Wright brothers.... 

The servants and train crew may have known the identities of one 
or two of us, but they did not know all, and it was the names of all 
printed together that would have made our mysterious journey 
significant in Washington, in Wall Street, even in London. Discovery, 
we knew, simply must not happen, or else all our time and effort 
would be wasted. If it were to be exposed publicly that our particular 
group had got together and written a banking bill, that bill would have 
no chance whatever of passage by Congress. 


The composition of the Jekyll Island meeting was a classic 
example of cartel structure. A cartel is a group of independent 
businesses which join together to coordinate the production, 
pricing, or marketing of their members. The purpose of a cartel is to 
reduce competition and thereby increase profitability. This is 
accomplished through a shared monopoly over their industry 
which forces the public to pay higher prices for their goods or 
services than would be otherwise required under free-enterprise 

1. "From Farm Boy to Financier," by Frank A. Vanderlip, The Saturday Evening 
Post, Feb. 9, 1933, pp. 25, 70. The identical story was told two years later in 
Vanderlip's book bearing the same title as the article (New York: D. Appleton- 
Century Company, 1935), pp. 210-219. 



Here were representatives of the world's leading banking 
consortia: Morgan, Rockefeller, Rothschild, Warburg, and Kuhn- 
Loeb. They were often competitors, and there is little doubt that 
there was considerable distrust between them and skillful maneu- 
vering for favored position in any agreement. But they were driven 
together by one overriding desire to fight their common enemy. 
The enemy was competition. 

In 1910, the number of banks in the United States was growing 
at a phenomenal rate. In fact, it had more than doubled to over 
twenty thousand in just the previous ten years. Furthermore, most 
of them were springing up in the South and West, causing the New 
York banks to suffer a steady decline of market share. Almost all 
banks in the 1880s were national banks, which means they were 
chartered by the federal government. Generally, they were located 
in the big cities, and were allowed by law to issue their own 
currency in the form of bank notes. Even as early as 1896, however, 
the number of non-national banks had grown to sixty-one per cent, 
and they already held fifty-four per cent of the country's total 
banking deposits. By 1913, when the Federal Reserve Act was 
passed, those numbers were seventy-one per cent non-national 
banks holding fifty-seven per cent of the deposits. 1 In the eyes of 
those duck hunters from New York, this was a trend that simply 
had to be reversed. 

Competition also was coming from a new trend in industry to 
finance future growth out of profits rather than from borrowed 
capital. This was the outgrowth of free-market interest rates which 
set a realistic balance between debt and thrift. Rates were low 
enough to attract serious borrowers who were confident of the 
success of their business ventures and of their ability to repay, but 
they were high enough to discourage loans for frivolous ventures 
or those for which there were alternative sources of funding— for 
example, one's own capital. That balance between debt and thrift 
was the result of a limited money supply. Banks could create loans 
in excess of their actual deposits, as we shall see, but there was a 
limit to that process. And that limit was ultimately determined by 
the supply of gold they held. Consequently, between 1900 and 
1910, seventy per cent of the funding for American corporate 

1. See Gabriel Kolko, The Triumph of Conservatism (New York: The Free Press of 
Glencoe, a division of the Macmillan Co., 1963), p. 140. 



growth was generated internally, making industry increasingly 
independent of the banks. 1 Even the federal government was 
becoming thrifty. It had a growing stockpile of gold, was systemati- 
cally redeeming the Greenbacks— which had been issued during 
the Civil War — and was rapidly reducing the national debt. 

Here was another trend that had to be halted. What the bankers 
wanted— and what many businessmen wanted also— was to inter- 
vene in the free market and tip the balance of interest rates 
downward, to favor debt over thrift. To accomplish this, the money 
supply simply had to be disconnected from gold and made more 
plentiful or, as they described it, more elastic. 


The greatest threat, however, came, not from rivals or private 
capital formation, but from the public at large in the form of what 
bankers call a run on the bank. This is because, when banks accept a 
customer's deposit, they give in return a "balance" in his account. 
This is the equivalent of a promise to pay back the deposit anytime 
he wants. Likewise, when another customer borrows money from 
the bank, he also is given an account balance which usually is 
withdrawn immediately to satisfy the purpose of the loan. This 
creates a ticking time bomb because, at that point, the bank has 
issued more promises to "pay-on-demand" than it has money in 
the vault. Even though the depositing customer thinks he can get 
his money any time he wants, in reality it has been given to the 
borrowing customer and no longer is available at the bank. 

The problem is compounded further by the fact that banks are 
allowed to loan even more money than they have received in 
deposit. The mechanism for accomplishing this seemingly impossi- 
ble feat will be described in a later chapter, but it is a fact of modern 
banking that promises-to-pay often exceed savings deposits by a 
factor of ten-to-one. And, because only about three per cent of these 
accounts are actually retained in the vault in the form of cash— the 
rest having been put into even more loans and investments — the 
bank's promises exceed its ability to keep those promises by a factor 
of over three hundred-to-one. 2 As long as only a small percentage 

1. William Greider, Secrets of the Temple (New York: Simon and Schuster, 1987), p. 
274, 275. Also Kolko, p. 145. 

2. Another way of putting it is that their reserves are underfunded by over 
33,333% (10-to-l divided by .03 = 333.333-tol. That divided by .01 = 33,333%.) 



of depositors request their money at one time, no one is the wiser. 
But if public confidence is shaken, and if more than a few per cent 
attempt to withdraw their funds, the scheme is finally exposed. The 
bank cannot keep all its promises and is forced to close its doors. 
Bankruptcy usually follows in due course. 


The same result could happen— and, prior to the Federal 
Reserve System, often did happen— even without depositors mak- 
ing a run on the bank. Instead of withdrawing their funds at the 
teller's window, they simply wrote checks to purchase goods or 
services. People receiving those checks took them to a bank for 
deposit. If that bank happened to be the same one from which the 
check was drawn, then all was well, because it was not necessary to 
remove any real money from the vault. But if the holder of the 
check took it to another bank, it was quickly passed back to the 
issuing bank and settlement was demanded between banks. 

This is not a one-way street, however. While the Downtown 
Bank is demanding payment from the Uptown Bank, the Uptown 
Bank is also clearing checks and demanding payment from the 
Downtown bank. As long as the money flow in both directions is 
equal, then everything can be handled with simple bookkeeping. 
But if the flow is not equal, then one of the banks will have to 
actually send money to the other to make up the difference. If the 
amount of money required exceeds a few percentage points of the 
bank's total deposits, the result is the same as a run on the bank by 
depositors. This demand of money by other banks rather than by 
depositors is called a currency drain. 

In 1910, the most common cause of a bank having to declare 
bankruptcy due to a currency drain was that it followed a loan 
policy that was more reckless than that of its competitors. More 
money was demanded from it because more money was loaned by 
it. It was dangerous enough to loan ninety per cent of their 
customers' savings (keeping only one dollar in reserve out of every 
ten), but that had proven to be adequate most of the time. Some 
banks, however, were tempted to walk even closer to the precipice. 
They pushed the ratio to ninety-too per cent, ninety -five per cent, 
ninety -nine per cent. After all, the way a bank makes money is to 
collect interest, and the only way to do that is to make loans. The 
more loans, the better. And, so, there was a practice among some of 



the more reckless banks to "loan up," as they call it. Which was 
another way of saying to push down their reserve ratios. 


If all banks could be forced to issue loans in the same ratio to 
their reserves as other banks did, then, regardless of how small that 
ratio was, the amount of checks to be cleared between them would 
balance in the long run. No major currency drains would ever 
occur. The entire banking industry might collapse under such a 
system, but not individual banks — at least not those that were part 
of the cartel. All would walk the same distance from the edge, 
regardless of how close it was. Under such uniformity, no individ- 
ual bank could be blamed for failure to meet its obligations. The 
blame could be shifted, instead, to the "economy" or "government 
policy" or "interest rates" or "trade deficits" or the "exchange- 
value of the dollar" or even to the "capitalist system" itself. 

But, in 1910, such a bankers' Utopia had not yet been created. If 
the Downtown bank began to loan at a greater ratio to its reserves 
than its competitors, the amount of checks which would come back 
to it for payment also would be greater. Thus, the bank which 
pursued a more reckless lending policy had to draw against its 
reserves in order to make payments to the more conservative banks 
and, when those funds were exhausted, it usually was forced into 

Historian John Klein tells us that "The financial panics of 1873, 
1884,1893, and 1907 were in large part an outgrowth of ... reserve 
pyramiding and excessive deposit creation by reserve city ... 
banks. These panics were triggered by the currency drains that took 
place in periods of relative prosperity when banks were loaned 
up." 1 In other words, the "panics" and resulting bank failures were 
caused, not by negative factors in the economy, but by currency 
drains on the banks which were loaned up to the point where they 
had practically no reserves at all. The banks did not fail because the 
system was weak. The system failed because the banks were weak. 

This was another common problem that brought these seven 
men over a thousand miles to a tiny island off the shore of Georgia. 
Each was a potentially fierce competitor, but uppermost in their 
minds were the so-called panics and the very real 1,748 bank 

1. See Vera C. Smith, The Rationale of Central Banking (London: P.S. King & Son, 
1936), p. 36. 



failures of the preceding two decades. Somehow, they had to join 
forces. A method had to be devised to enable them to continue to 
make more promises to pay-on-demand than they could keep. To 
do this, they had to find a way to force all banks to walk the same 
distance from the edge, and, when the inevitable disasters 
happened, to shift public blame away from themselves. By making 
it appear to be a problem of the national economy rather than of 
private banking practice, the door then could be opened for the use 
of tax money rather than their own funds for paying off the losses. 

Here, then, were the main challenges that faced that tiny but 
powerful group assembled on Jekyll Island: 

1. How to stop the growing influence of small, rival banks and to 

insure that control over the nation's financial resources would 
remain in the hands of those present; 

2. How to make the money supply more elastic in order to reverse 

the trend of private capital formation and to recapture the 
industrial loan market; 

3. How to pool the meager reserves of the nation's banks into one 

large reserve so that all banks will be motivated to follow the 
same loan-to-deposit ratios. This would protect at least some of 
them from currency drains and bank runs; 

4. Should this lead eventually to the collapse of the whole banking 

system, then how to shift the losses from the owners of the 
banks to the taxpayers. 


Everyone knew that the solution to all these problems was a 
cartel mechanism that had been devised and already put into 
similar operation in Europe. As with all cartels, it had to be created 
by legislation and sustained by the power of government under the 
deception of protecting the consumer. The most important task 
before them, therefore, can be stated as objective number five: 

5. How to convince Congress that the scheme was a measure to 

protect the public. 

The task was a delicate one. The American people did not like 
the concept of a cartel. The idea of business enterprises joining 
together to fix prices and prevent competition was alien to the 
free-enterprise system. It could never be sold to the voters. But, if 
the word cartel was not used, if the venture could be described 



with words which are emotionally neutral-perhaps even allur- 
ing—then half the battle would be won. , t , 
The first decision, therefore, was to follow the practice adopted 
in Europe. Henceforth, the cartel would operate as a central bank. 
And even that was to be but a generic expression. For purposes of 
public relations and legislation, they would devise a name that 
would avoid the word bank altogether and which would conjure 
the image of the federal government itself. Furthermore, to create 
the impression that there would be no concentration of power, they 
would establish regional branches of the cartel and make that a 
main selling point. Stephenson tells us: "Aldrich entered this 
discussion at Jekyll Island an ardent convert to the idea of a central 
bank His desire was to transplant the system of one of the great 
European banks, say the Bank of England, bodily to America." But 
political expediency required that such plans be concealed from the 
public. As John Kenneth Galbraith explained it: "It was his 
[Aldrich's] thought to outflank the opposition by having not one 
central bank but many. And the word bank would itself be 
avoided." 2 

With the exception of Aldrich, all of those present were 
bankers, but only one was an expert on the European model of a 
central bank. Because of this knowledge, Paul Warburg became the 
dominant and guiding mind throughout all of the discussions. 
Even a casual perusal of the literature on the creation of the Federal 
Reserve System is sufficient to find that he was, indeed, the cartel's 
mastermind. Galbraith says "... Warburg has, with some justice, 
been called the father of the system." 3 Professor Edwin Seligman, a 
member of the international banking family of J. & W. Seligman, 
and head of the Department of Economics at Columbia University, 
writes that "... in its fundamental features, the Federal Reserve Act 
is the work of Mr. Warburg more than any other man in the 
country." 4 

2. Stephenson Galbraith, Money. Whence It Came, Where It Went (Boston: 
Houghton Mifflin, 1975), p. 122. 

3. Galbraith, p. 123. 

4. The Academy of Political Science, Proceedings, 1914, Vol. 4, No. 4, p. 387. 




Paul Moritz Warburg was a leading member of the investment 
banking firm of M.M. Warburg & Company of Hamburg, 
Germany, and Amsterdam, the Netherlands. He had come to the 
United States only nine years previously. Soon after arrival, how- 
ever, and with funding provided mostly by the Rothschild group, 
he and his brother, Felix, had been able to buy partnerships in the 
New York investment banking firm of Kuhn, Loeb & Company, 
while continuing as partners in Warburg of Hamburg. 1 Within 
twenty years, Paul would become one of the wealthiest men in 
America with an unchallenged domination over the country's 
railroad system. 

At this distance in history, it is difficult to appreciate the 
importance of this man. But some understanding may be had from 
the fact that the legendary character, Daddy Warbucks, in the 
comic strip Little Orphan Annie, was a contemporary commentary 
on the presumed benevolence of Paul Warburg, and the almost 
magic ability to accomplish good through the power of his unlim- 
ited wealth. 

A third brother, Max Warburg, was the financial adviser of the 
Kaiser and became Director of the Reichsbank in Germany. This 
was, of course, a central bank, and it was one of the cartel models 
used in the construction of the Federal Reserve System. The 
Reichsbank, incidentally, a few years later would create the massive 
hyperinflation that occurred in Germany, wiping out the middle 
class and the entire German economy as well. 

Paul Warburg soon became well known on Wall Street as a 
persuasive advocate for a central bank in America. Three years 
before the Jekyll Island meeting, he had published several pam- 
phlets. One was entitled Defects and Needs of Our Banking System, 
and the other was A Plan for A Modified Central Bank. These 
attracted wide attention in both financial and academic circles and 
set the intellectual climate for all future discussions regarding 
banking legislation. In these treatises, Warburg complained that the 
American monetary system was crippled by its dependency on 
gold and government bonds, both of which were in limited supply. 
What America needed, he argued, was an elastic money supply that 

1. Anthony Sutton, Wall Street and FDR (New Rochelle, New York: Arlington House, 
1975), p. 92. 



could be expanded and contracted to accommodate the fluctuating 
needs of commerce. The solution, he said, was to follow the 
German example whereby banks could create currency solely on 
the basis of "commercial paper," which is banker language for 

I OU.s from corporations. 

Warburg was tireless in his efforts. He was a featured speaker 
before scores of influential audiences and wrote a steady stream of 
published articles on the subject. In March of that year, for example, 
The New York Times published an eleven-part series written by 
Warburg explaining and expounding what he called the Reserve 
Bank of the United States. 1 


Most of Warburg's writing and lecturing on this topic was 
eyewash for the public. To cover the fact that a central bank is 
merely a cartel which has been legalized, its proponents had to lay 
down a thick smoke screen of technical jargon focusing always on 
how it would supposedly benefit commerce, the public, and the 
nation; how it would lower interest rates, provide funding for 
needed industrial projects, and prevent panics in the economy. 
There was not the slightest glimmer that, underneath it all, was a 
master plan which was designed from top to bottom to serve 
private interests at the expense of the public. 

This was, nevertheless, the cold reality, and the more percep- 
tive bankers were well aware of it. In an address before the 
American Bankers Association the following year, Aldrich laid it 
out for anyone who was really listening to the meaning of his 
words. He said: "The organization proposed is not a bank, but a 
cooperative union of all the banks of the country for definite 
purposes." 2 Precisely. A union of banks. 

Two years later, in a speech before that same group of bankers, 
A. Barton Hepburn of Chase National Bank was even more candid. 
He said: "The measure recognizes and adopts the principles of a 
central bank. Indeed, if it works out as the sponsors of the law 
hope, it will make all incorporated banks together joint owners of a 

1. See J. Lawrence Laughlin, The Federal Reserve Act: Its Origin and Problems (New 
York: Macmillan, 1933), p. 9. 

2. The full text of the speech is reprinted by Herman E. Krooss and Paul A. 
Samuelson, Vol. 3, p. 1202. 



central dominating power." 1 And that is about as good a definition 
of a cartel as one is likely to find. 

In 1914, one year after the Federal Reserve Act was passed into 
law, Senator Aldrich could afford to be less guarded in his remarks. 
In an article published in July of that year in a magazine called The 
Independent, he boasted: "Before the passage of this Act, the New 
York bankers could only dominate the reserves of New York. Now 
we are able to dominate the bank reserves of the entire country." 


The accepted version of history is that the Federal Reserve was 
created to stabilize our economy. One of the most widely-used 
textbooks on this subject says: "It sprang from the panic of 1907, 
with its alarming epidemic of bank failures: the country was fed ujd 
once and for all with the anarchy of unstable private banking." 
Even the most naive student must sense a grave contradiction 
between this cherished view and the System's actual performance. 
Since its inception, it has presided over the crashes of 1921 and 
1929; the Great Depression of '29 to '39; recessions in '53, '57, '69, 
'75, and '81; a stock market "Black Monday" in '87; and a 1000% 
inflation which has destroyed 90% of the dollar's purchasing 

Let us be more specific on that last point. By 1990, an annual 
income of $10,000 was required to buy what took only $1,000 in 
1914. 4 That incredible loss in value was quietly transferred to the 
federal government in the form of hidden taxation, and the Federal 
Reserve System was the mechanism by which it was accomplished. 

Actions have consequences. The consequences of wealth confis- 
cation by the Federal-Reserve mechanism are now upon us. In the 
current decade, corporate debt is soaring; personal debt is greater 
than ever; both business and personal bankruptcies are at an 
all-time high; banks and savings and loan associations are failing in 

1. Quoted by Kolko, Triumph, p. 235. 

2. Paul A. Samuelson, Economics, 8th ed. (New York: McGraw-Hill, 1970), p. 272. 

3. See "Money, Banking, and Biblical Ethics," by Ronald H. Nash, Dwell Journal of 
Money and Banking, February, 1990. 

4. When one considers that the income tax had just been introduced in 1913 and 
that such low figures were completely exempt, an income at that time of $1,000 
actually was the equivalent of earning $15,400 now, before paying 35 % taxes. When 
the amount now taken by state and local governments is added to the total bite, the 
figure is close to $20,000. 



larger numbers than ever before; interest on the national debt is 
consuming half of our tax dollars; heavy industry has been largely 
replaced by overseas competitors; we are facing an international 
trade deficit for the first time in our history; 75% of downtown Los 
Angeles and other metropolitan areas is now owned by foreigners; 
and over half of our nation is in a state of economic recession. 


That is the scorecard eighty years after the Federal Reserve was 
created supposedly to stabilize our economy! There can be no 
argument that the System has failed in its stated objectives. 
Furthermore, after all this time, after repeated changes in person- 
nel, after operating under both political parties, after numerous 
experiments in monetary philosophy, after almost a hundred 
revisions to its charter, and after the development of countless new 
formulas and techniques, there has been more than ample opportu- 
nity to work out mere procedural flaws. It is not unreasonable to 
conclude, therefore, that the System has failed, not because it needs 
a new set of rules or more intelligent directors, but because it is 
incapable of achieving its stated objectives. 

If an institution is incapable of achieving its objectives, there is 
no reason to preserve it— unless it can be altered in some way to 
change its capability. That leads to the question: why is the System 
incapable of achieving its stated objectives? The painful answer is: 
those were never its true objectives. When one realizes the circum- 
stances under which it was created, when one contemplates the 
identities of those who authored it, and when one studies its actual 
performance over the years, it becomes obvious that the System is 
merely a cartel with a government facade. There is no doubt that 
those who run it are motivated to maintain full employment, high 
productivity, low inflation, and a generally sound economy. They 
are not interested in killing the goose that lays such beautiful 
golden eggs. But, when there is a conflict between the public 
interest and the private needs of the cartel— a conflict that arises 
almost daily — the public will be sacrificed. That is the nature of the 
beast. It is foolish to expect a cartel to act in any other way. 

This view is not encouraged by Establishment institutions and 
publishers. It has become their apparent mission to convince the 
American people that the system is not intrinsically flawed. It 
merely has been in the hands of bumbling oafs. For example, 


William Greider was a former Assistant Managing Editor for The 
Washington Post. His book, Secrets of The Temple, was published in 
1987 by Simon and Schuster. It was critical of the Federal Reserve 
because of its failures, but, according to Greider, these were not 
caused by any defect in the System itself, but merely because the 
economic factors are "sooo complicated" that the good men who 
have struggled to make the System work have just not yet been able 
to figure it all out. But, don't worry, folks, they're working on it! 
That is exactly the kind of powder-puff criticism which is accept- 
able in our mainstream media. Yet, Greider' s own research points 
to an entirely different interpretation. Speaking of the System's 
origin, he says: 

As new companies prospered without Wall Street, so did the new 
regional banks that handled their funds. New York's concentrated 
share of bank deposits was still huge, about half the nation's total, but 
it was declining steadily. Wall Street was still "the biggest kid on the 
block," but less and less able to bully the others. 

This trend was a crucial fact of history, a misunderstood reality 
that completely alters the political meaning of the reform legislation 
that created the Federal Reserve. At the time, the conventional wisdom 
in Congress, widely shared and sincerely espoused by Progressive 
reformers, was that a government institution would finally harness the 
"money trust," disarm its powers, and establish broad democratic 
control over money and credit.... The results were nearly the opposite. 
The money reforms enacted in 1913, in fact, helped to preserve the 
status quo, to stabilize the old order. Money-center bankers would not 
only gain dominance over the new central bank, but would also enjoy 
new insulation against instability and their own decline. Once the Fed 
was in operation, the steady diffusion of financial power halted. Wall 
Street maintained its dominant position — and even enhanced it. 1 

Anthony Sutton, former Research Fellow at the Hoover Institu- 
tion for War, Revolution and Peace, and also Professor of Econom- 
ics at California State University, Los Angeles, provides a 
somewhat deeper analysis. He writes: 

Warburg's revolutionary plan to get American Society to go to 
work for Wall Street was astonishingly simple. Even today,... academic 
theoreticians cover their blackboards with meaningless equations, and 
the general public struggles in bewildered confusion with inflation 
and the coming credit collapse, while the quite simple explanation of 

1. Greider, p. 275. 


the problem goes undiscussed and almost entirely uncomprehended. 
The Federal Reserve System is a legal private monopoly of the money 
supply operated for the benefit of the few under the guise of 
protecting and promoting the public interest. 

The real significance of the journey to Jekyll Island and the 
creature that was hatched there was inadvertently summarized by 
the words of Paul Warburg's admiring biographer, Harold Kellock: 

Paul M. Warburg is probably the mildest-mannered man that ever 
personally conducted a revolution. It was a bloodless revolution: he 
did not attempt to rouse the populace to arms. He stepped forth armed 
simply with an idea. And he conquered. That's the amazing thing. A 
shy, sensitive man, he imposed his idea on a nation of a hundred 
million people. 2 


The basic plan for the Federal Reserve System was drafted at a 
secret meeting held in November of 1910 at the private resort of J.P. 
Morgan on Jekyll Island off the coast of Georgia. Those who 
attended represented the great financial institutions of Wall Street 
and, indirectly, Europe as well. The reason for secrecy was simple. 
Had it been known that rival factions of the banking community 
had joined together, the public would have been alerted to the 
possibility that the bankers were plotting an agreement in restraint 
of trade— which, of course, is exactly what they were doing. What 
emerged was a cartel agreement with five objectives: stop the 
growing competition from the nation's newer banks; obtain a 
franchise to create money out of nothing for the purpose of lending; 
get control of the reserves of all banks so that the more reckless 
ones would not be exposed to currency drains and bank runs; get 
the taxpayer to pick up the cartel's inevitable losses; and convince 
Congress that the purpose was to protect the public. It was realized 
that the bankers would have to become partners with the politi- 
cians and that the structure of the cartel would have to be a central 
bank. The record shows that the Fed has failed to achieve its stated 
objectives. That is because those were never its true goals. As a 
banking cartel, and in terms of the five objectives stated above, it 
has been an unqualified success. 

1. Sutton, Wall Street and F.D.R., p. 94. 

2. Harold Kellock, "Warburg, the Revolutionist," The Century Magazine, May 1915, 
p. 79. 

JekyH Island Museum 

Abraham Piatt Andrew 

Henry P. Davison (L) and Charles D. Norton (R) 

The seven men who attended the secret meetining on Jekyi 
Island, where the Federal Reserve System was conceived, 
represented an estimated one-fourth of the total wealth of fit 
entire world. They were: 

1. Nelson W. Aldrich, Republican "whip" in the Senate, 
Chairman of the National Monetary Commission, 
father-in-law to John D. Rockefeller, Jr.; 

2. Henry P. Davison, Sr. Partner of J. P. Morgan Company 

3. Charles D. Norton, Pres. of 1st National Bankof New Yark 

4. A. Piatt Andrew, Assistant Secretary of the Treasury; 
Frank A. Vanderlip, President of the National City Bankof 

5. New York, representing William Rockefeller. 

6. Benjamin Strong, head of J. P. Morgan's Bankers Trust 
Company, later to become head of the System; 

7. Paul M. Warburg, a partner in Kuhn, Loeb & Company, 
representing the Rothschilds and Warburgs in Europe. 

Jekyll I 

Frank A. Vanderlip 

Jekyll Island Museum 

Benjamin Strong 


Jekyll Island Museuf 

Paul M. Warburg 

Chapter Two 


The analogy of a spectator sporting event as a 
means of explaining the rules by ivhich taxpayers 
are required to pick up the cost of bailing out the 
banks ivhen their loans go sour. 

It was stated in the previous chapter that the Jekyll Island 
group which conceived the Federal Reserve System actually cre- 
ated a national cartel which was dominated by the larger banks. It 
was also stated that a primary objective of that cartel was to involve 
the federal government as an agent for shifting the inevitable losses 
from the owners of those banks to the taxpayers. That, of course, is 
one of the more controversial assertions made in this book. Yet, 
there is little room for any other interpretation when one confronts 
the massive evidence of history since the System was created. Let 
us, therefore, take another leap through time. Having jumped to 
the year 1910 to begin this story, let us now return to the present 

To understand how banking losses are shifted to the taxpayers, 
it is first necessary to know a little bit about how the scheme was 
designed to work. There are certain procedures and formulas 
which must be understood or else the entire process seems like 
chaos. It is as though we had been isolated all our lives on a South 
Sea island with no knowledge of the outside world. Imagine what it 
would then be like the first time we travelled to the mainland and 
witnessed a game of professional football. We would stare with 
incredulity at men dressed like aliens from another planet; throw- 
ing their bodies against each other; tossing a funny shaped object 
back and forth; fighting over it as though it were of great value, yet, 
occasionally kicking it out of the area as though it were worthless 
and despised; chasing each other, knocking each other to the 
ground and then walking away to regroup for another surge; all 



this with tens of thousand of spectators riotously shouting in 
unison for no apparent reason at all. Without a basic understanding 
that this was a game and without knowledge of the rules of that 
game, the event would appear as total chaos and universal 

The operation of our monetary system through the Federal 
Reserve has much in common with professional football. First, 
there are certain plays that are repeated over and over again with 
only minor variations to suit the special circumstances. Second, 
there are definite rules which the players follow with great 
precision. Third, there is a clear objective to the game which is 
uppermost in the minds of the players. And fourth, if the spectators 
are not familiar with that objective and if they do not understand 
the rules, they will never comprehend what is going on. Which, as 
far as monetary matters is concerned, is the common state of the 
vast majority of Americans today. 

Let us, therefore, attempt to spell out in plain language what 
that objective is and how the players expect to achieve it. To 
demystify the process, we shall present an overview first. After the 
concepts are clarified, we then shall follow up with actual examples 
taken from the recent past. 

The name of the game is Bailout. As stated previously, the 
objective of this game is to shift the inevitable losses from the 
owners of the larger banks to the taxpayers. The procedure by 
which this is accomplished is as follows: 


The game begins when the Federal Reserve System allows 
commercial banks to create checkbook money out of nothing. 
(Details regarding how this incredible feat is accomplished are 
given in chapter ten entitled The Mandrake Mechanism.) The banks 
derive profit from this easy money, not by spending it, but by 
lending it to others and collecting interest. 

When such a loan is placed on the bank's books it is shown as 
an asset because it is earning interest and, presumably, someday 
will be paid back. At the same time an equal entry is mad.? on the 
liability side of the ledger. That is because the newly created 
checkbook money now is in circulation, and most of it will end up 
in other banks which will return the canceled checks to the issuing 
bank for payment. Individuals may also bring some of this check- 



book money back to the bank and request cash. The issuing bank, 
therefore, has a potential money pay-out liability equal to the 
amount of the loan asset. 

When a borrower cannot repay and there are no assets which 
can be taken to compensate, the bank must write off that loan as a 
loss- However, since most of the money originally was created out 
of nothing and cost the bank nothing except bookkeeping over- 
head, there is little of tangible value that is actual lost. It is primarily 
a bookkeeping entry. 

A bookkeeping loss can still be undesirable to a bank because it 
causes the loan to be removed from the ledger as an asset without a 
reduction in liabilities. The difference must come from the equity of 
I hose who own the bank. In other words, the loan asset is removed, 
but the money liability remains. The original checkbook money is 
still circulating out there even though the borrower cannot repay, 
and the issuing bank still has the obligation to redeem those checks. 
The only way to do this and balance the books once again is to 
draw upon the capital which was invested by the bank's stockhold- 
ers or to deduct the loss from the bank's current profits. In either 
case, the owners of the bank lose an amount equal to the value of 
the defaulted loan. So, to them, the loss becomes very real. If the 
bank is forced to write off a large amount of bad loans, the amount 
could exceed the entire value of the owners' equity. When that 
happens, the game is over, and the bank is insolvent. 

This concern would be sufficient to motivate most bankers to be 
very conservative in their loan policy, and in fact most of them do 
act with great caution when dealing with individuals and small 
businesses. But the Federal Reserve System, the Federal Deposit 
Insurance Corporation, and the Federal Deposit Loan Corporation 
now guarantee that massive loans made to large corporations and 
to other governments will not be allowed to fall entirely upon the 
bank's owners should those loans go into default. This is done 
under the argument that, if these corporations or banks are allowed 
to fail, the nation would suffer from vast unemployment and 
economic disruption. More on that in a moment. 


The end result of this policy is that the banks have little motive 
to be cautious and are protected against the effect of their own 
folly. The larger the loan, the better it is, because it will produce the 



greatest amount of profit with the least amount of effort. A single 
loan to a third-world country netting hundreds of millions of 
dollars in annual interest is just as easy to process— if not easier — 
than a loan for $50,000 to a local merchant on the shopping mall. If 
the interest is paid, it's gravy time. If the loan defaults, the federal 
government will "protect the public" and, through various mecha- 
nisms described shortly, will make sure that the banks continue to 
receive their interest. 

The individual and the small businessman find it increasingly 
difficult to borrow money at reasonable rates, because the banks 
can make more money on loans to the corporate giants and to 
foreign governments. Also, the bigger loans are safer for the banks, 
because the government will make them good even if they default. 
There are no such guarantees for the small loans. The public will 
not swallow the line that bailing out the little guy is necessary to 
save the system. The dollar amounts are too small. Only when the 
figures become mind-boggling does the ploy become plausible. 

It is important to remember that banks do not really want to 
have their loans repaid, except as evidence of the dependability of 
the borrower. They make a profit from interest on the loan, not 
repayment of the loan. If a loan is paid off, the bank merely has to 
find another borrower, and that can be an expensive nuisance. It is 
much better to have the existing borrower pay only the interest and 
never make payments on the loan itself. That process is called 
rolling over the debt. One of the reasons banks prefer to lend to 
governments is that they do not expect those loans ever to be 
repaid. When Walter Wriston was chairman of the Citicorp Bank in 
1982, he extolled the virtue of the action this way: 

If we had a truth-in-Government act comparable to the 
truth-in-advertising law, every note issued by the Treasury would be 
obliged to include a sentence stating: "This note will be redeemed with 
the proceeds from an identical note which will be sold to the public 
when this one comes due." 

When this activity is carried out in the United States, as it is 
weekly, it is described as a Treasury bill auction. But when 
basically the same process is conducted abroad in a foreign 
language, our news media usually speak of a country's "rolling 
over its debts." The perception remains that some form of disaster 
is inevitable. It is not. 



To see why, it is only necessary to understand the basic facts of 
government borrowing. The first is that there are few recorded 
instances in history of government— any government— actually 
getting out of debt. Certainly in an era of $100-billion deficits, no 
one lending money to our Government by buying a Treasury bill 
expects that it will be paid at maturity in any way except by our 
Government's selling a new bill of like amount. 


Since the system makes it profitable for banks to make large, 
unsound loans, that is the kind of loans which banks will make. 
Furthermore, it is predictable that most unsound loans eventually 
will go into default. When the borrower finally declares that he 
cannot pay, the bank responds by rolling over the loan. This often is 
stage managed to appear as a concession on the part of the bank 
but, in reality, it is a significant forward move toward the objective 
of perpetual interest. 

Eventually the borrower comes to the point where he can no 
longer pay even the interest. Now the play becomes more complex. 
The bank does not want to lose the interest, because that is its 
stream of income. But it cannot afford to allow the borrower to go 
into default either, because that would require a write-off which, in 
turn, could wipe out the owners' equity and put the bank out of 
business. So the bank's next move is to create additional money out 
of nothing and lend that to the borrower so he will have enough to 
continue paying the interest, which by now must be paid on the 
original loan plus the additional loan as well. What looked like 
certain disaster suddenly is converted by a brilliant play into a 
major score. This not only maintains the old loan on the books as an 
asset, it actually increases the apparent size of that asset and also 
results in higher interest payments, thus, greater profit to the bank. 


Sooner or later, the borrower becomes restless. He is not 
interested in making interest payments with nothing left for 
himself. He comes to realize that he is merely working for the bank 
and, once again, interest payments stop. The opposing teams go 
into a huddle to plan the next move, then rush to the scrimmage 

1- "Banking Against Disaster," by Walter B. Wriston, The New York Times, Septem- 
ber 14,1982. 



line where they hurl threatening innuendoes at each other. The 
borrower simply cannot, will not pay. Collect if you can. The lender 
threatens to blackball the borrower, to see to it that he will never 
again be able to obtain a loan. Finally, a "compromise" is worked 
out. As before, the bank agrees to create still more money out of 
nothing and lend that to the borrower to cover the interest on both 
of the previous loans but, this time, they up the ante to provide still 
additional money for the borrower to spend on something other than 
interest. That is a perfect score. The borrower suddenly has a fresh 
supply of money for his purposes plus enough to keep making 
those bothersome interest payments. The bank, on the other hand, 
now has still larger assets, higher interest income, and greater profits. 
What an exciting game! 


The previous plays can be repeated several times until the 
reality finally dawns on the borrower that he is sinking deeper and 
deeper into the debt pit with no prospects of climbing out. This 
realization usually comes when the interest payments become so 
large they represent almost as much as the entire corporate 
earnings or the country's total tax base. This time around, roll-overs 
with larger loans are rejected, and default seems inevitable. 

But wait. What's this? The players are back at the scrimmage 
line. There is a great confrontation. Referees are called in. Two 
shrill blasts from the horn tell us a score has been made for both 
sides. A voice over the public address system announces: "This 
loan has been rescheduled. " 

Rescheduling usually means a combination of a lower interest 
rate and a longer period for repayment. The effect is primarily 
cosmetic. It reduces the monthly payment but extends the period 
further into the future. This makes the current burden to the 
borrower a little easier to carry, but it also makes repayment of the 
capital even more unlikely. It postpones the day of reckoning but, 
in the meantime, you guessed it: The loan remains as an asset, and 
the interest payments continue. 


Eventually the day of reckoning arrives. The borrower realizes 
he can never repay the capital and flatly refuses to pay interest on it. 
It is time for the Final Maneuver. 



According to the Banking Safety Digest, which specializes in 
rating the safety of America's banks and S&Ls, most of the banks 
involved with "problem loans" are quite profitable businesses: 

Note that, exceptfor third-world loans, most of the large banks in the 
country are operating quite profitably. In contrast with the 
continually-worsening S&L crisis, the banks' profitability has been the 
engine with which they have been working off (albeit slowly) their 
overseas debt.... At last year's profitability levels, the banking 
industry could, in theory, "buy out" the entirety of their own Latin 
American loans within two years. 1 

The banks can absorb the losses of their bad loans to multi- 
national corporations and foreign governments, but that is not 
according to the rules. It would be a major loss to the stockholders 
who would receive little or no dividends during the adjustment 
period, and any chief executive officer who embarked upon such a 
course would soon be looking for a new job. That this is not part of 
the game plan is evident by the fact that, while a small portion of 
the Latin American debt has been absorbed, the banks are continu- 
ing to make gigantic loans to governments in other parts of the 
world, particularly Africa, Red China, and Eastern European 
nations. For reasons which will be analyzed in chapter four, there is 
little hope that the performance of these loans will be different than 
those in Latin America. But the most important reason for not 
absorbing the losses is that there is a standard play that can still 
breathe life back into those dead loans and reactivate the bountiful 
income stream that flows from them. 

Here's how it works. The captains of both teams approach the 
referee and the Game Commissioner to request that the game be 
extended. The reason given is that this is in the interest of the 
public, the spectators who are having such a wonderful time and 
who will be sad to see the game ended. They request also that, 
while the spectators are in the stadium enjoying themselves, the 
parking-lot attendants be ordered to quietly remove the hub caps 
from every car. These can be sold to provide money for additional 
salaries for all the players, including the referee and, of course, the 
Commissioner himself. That is only fair since they are now 

1- "Overseas Lending ... Trigger for A Severe Depression?" The Banking Safety 
Digest (U.S. Business Publishing/ Veribanc, Wakefield, Massachusetts), August, 
1989, p. 3. 



working overtime for the benefit of the spectators. When the deal is 
finally struck, the horn will blow three times, and a roar of joyous 
relief will sweep across the stadium. 

In a somewhat less recognizable form, the same play may look 
like this: The president of the lending bank and the finance officer 
of the defaulting corporation or government will join together and 
approach Congress. They will explain that the borrower has 
exhausted his ability to service the loan and, without assistance 
from the federal government, there will be dire consequences for 
the American people. Not only will there be unemployment and 
hardship at home, there will be massive disruptions in world 
markets. And, since we are now so dependent on those markets, 
our exports will drop, foreign capital will dry up, and we will 
suffer greatly. What is needed, they will say, is for Congress to 
provide money to the borrower, either directly or indirectly, to 
allow him to continue to pay interest on the loan and to initiate new 
spending programs which will be so profitable he will soon be able 
to pay everyone back. 

As part of the proposal, the borrower will agree to accept the 
direction of a third-party referee in adopting an austerity program 
to make sure that none of the new money is wasted. The bank also 
will agree to write off a small part of the loan as a gesture of its 
willingness to share the burden. This move, of course, will have 
been foreseen from the very beginning of the game, and is a small 
step backward to achieve a giant stride forward. After all, the 
amount to be lost through the write-off was created out of nothing 
in the first place and, without this Final Maneuver, the entirety 
would be written off. Furthermore, this modest write down is 
dwarfed by the amount to be gained through restoration of the 
income stream. 


One of the standard variations of the Final Maneuver is for the 
government, not always to directly provide the funds, but to 
provide the credit for the funds. That means to guarantee future 
payments should the borrower again default. Once Congress 
agrees to this, the government becomes a co-signer to the loan, and 
the inevitable losses are finally lifted from the ledger of the bank 
and placed onto the backs of the American taxpayer. 



Money now begins to move into the banks through a complex 
system of federal agencies, international agencies, foreign aid, and 
direct subsidies. All of these mechanisms extract payments from 
the American people and channel them to the deadbeat borrowers 
who then send them to the banks to service their loans. Very little 
of this money actually comes from taxes. Almost all of it is 
generated by the Federal Reserve System. When this newly created 
money returns to the banks, it quickly moves out again into the 
economy where it mingles with and dilutes the value of the money 
already there. The result is the appearance of rising prices but 
which, in reality, is a lowering of the value of the dollar. 

The American people have no idea they are paying the bill. 
They know that someone is stealing their hub caps, but they think it 
is the greedy businessman who raises prices or the selfish laborer 
who demands higher wages or the unworthy farmer who demands 
too much for his crop or the wealthy foreigner who bids up our 
prices. They do not realize that these groups also are victimized by a 
monetary system which is constantly being eroded in value by and 
through the Federal Reserve System. 

Public ignorance of how the game is really played was dramati- 
cally displayed during a recent Phil Donahue TV show. The topic 
was the Savings and Loan crisis and the billions of dollars that it 
would cost the taxpayer. A man from the audience rose and asked 
angrily: "Why can't the government pay for these debts instead of 
the taxpayer?" And the audience of several hundred people 
actually cheered in enthusiastic approval! 


Since large, corporate loans are often guaranteed by the federal 
government, one would think that the banks which make those 
loans would never have a problem. Yet, many of them still manage 
to bungle themselves into insolvency. As we shall see in a later 
section of this study, insolvency actually is inherent in the system 
itself, a system called fractional-reserve banking. 

Nevertheless, a bank can operate quite nicely in a state of 
insolvency so long as its customers don't know it. Money is 
brought into being and transmuted from one imaginary form to 
another by mere entries on a ledger, and creative bookkeeping can 
always make the bottom line appear to balance. The problem arises 
when depositors decide, for whatever reason, to withdraw their 



money. Lo and behold, there isn't enough to go around and, when 
that happens, the cat is finally out of the bag. The bank must close 
its doors, and the depositors still waiting in line outside are ... well, 
just that: still waiting. 

The proper solution to this problem is to require the banks, like 
all other businesses, to honor their contracts. If they tell their 
customers that deposits are "payable upon demand," then they 
should hold enough cash to make good on that promise, regardless 
of when the customers want it or how many of them want it. In 
other words, they should keep cash in the vault equal to 100% of 
their depositors' accounts. When we give our hat to the hat-check 
girl and obtain a receipt for it, we don't expect her to rent it out 
while we eat dinner hoping she'll get it back — or one just like it— in 
time for our departure. We expect all the hats to remain there all the 
time so there will be no question of getting ours back precisely 
when we want it. 

On the other hand, if the bank tells us it is going to lend our 
deposit to others so we can earn a little interest on it, then it should 
also tell us forthrightly that we cannot have our money back on 
demand. Why not? Because it is loaned out and not in the vault any 
longer. Customers who earn interest on their accounts should be 
told that they have time deposits, not demand deposits, because the 
bank will need a stated amount of time before it will be able to 
recover the money which was loaned out. 

None of this is difficult to understand, yet bank customers are 
seldom informed of it. They are told they can have their money any 
time they want it and they are paid interest as well. Even if they do 
not receive interest, the hank does, and this is how so many 
customer services can be offered at little or no direct cost. Occasion- 
ally, a thirty-day or sixty-day delay will be mentioned as a 
possibility, but that is greatly inadequate for deposits which have 
been transformed into ten, twenty, or thirty-year loans. The banks 
are simply playing the odds that everything will work out most of 
the time. 

We shall examine this issue in greater detail in a later section 
but, for now, it is sufficient to know that total disclosure is not how 
the banking game is played. The Federal Reserve System has 
legalized and institutionalized the dishonesty of issuing more hat 
checks than there are hats and it has devised complex methods of 
disguising this practice as a perfectly proper and normal feature of 



banking. Students of finance are told that there simply is no other 
way for the system to function. Once that premise is accepted, then 
all attention can be focused, not on the inherent fraud, but on ways 
and means to live with it and make it as painless as possible. 

Based on the assumption that only a small percentage of the 
depositors will ever want to withdraw their money at the same 
time, the Federal Reserve allows the nation's commercial banks to 
operate with an incredibly thin layer of cash to cover their promises 
to pay "on demand." When a bank runs out of money and is unable 
to keep that promise, the System then acts as a lender of last resort. 
That is banker language meaning it stands ready to create money 
out of nothing and immediately lend it to any bank in trouble. 
(Details on how that is accomplished are in chapter eight.) But there 
are practical limits to just how far that process can work. Even the 
Fed will not support a bank that has gotten itself so deeply in the 
hole it has no realistic chance of digging out. When a bank's 
bookkeeping assets finally become less than its liabilities, the rules 
of the game call for transferring the losses to the depositors 
themselves. This means they pay twice: once as taxpayers and again 
as depositors. The mechanism by which this is accomplished is 
called the Federal Deposit Insurance Corporation. 


The FDIC guarantees that every insured deposit will be paid 
back regardless of the financial condition of the bank. The money to 
do this comes out of a special fund which is derived from 
assessments against participating banks. The banks, of course, do 
not pay this assessment. As with all other expenses, the bulk of the 
cost ultimately is passed on to their customers in the form of higher 
service fees and lower interest rates on deposits. 

The FDIC is usually described as an insurance fund, but that is 
deceptive advertising at its worst. One of the primary conditions of 
insurance is that it must avoid what underwriters call "moral 
hazard." That is a situation in which the policyholder has little 
incentive to avoid or prevent that which is being insured against. 
When moral hazard is present, it is normal for people to become 
careless, and the likelihood increases that what is being insured 
against will actually happen. An example would be a government 
Program forcing everyone to pay an equal amount into a fund to 
protect them from the expense of parking fines. One hesitates even 



to mention this absurd proposition lest some enterprising politician 
should decide to put it on the ballot. Therefore, let us hasten to 
point out that, if such a numb-skull plan were adopted, two things 
would happen: (1) just about everyone soon would be getting 
parking tickets and (2), since there now would be so many of them, 
the taxes to pay for those tickets would greatly exceed the previous 
cost of paying them without the so-called protection. 

The FDIC operates exactly in this fashion. Depositors are told 
their insured accounts are protected in the event their bank should 
become insolvent. To pay for this protection, each bank is assessed 
a specified percentage of its total deposits. That percentage is the 
same for all banks regardless of their previous record or how risky 
their loans. Under such conditions, it does not pay to be cautious. 
The banks making reckless loans earn a higher rate of interest than 
those making conservative loans. They also are far more likely to 
collect from the fund, yet they pay not one cent more. Conservative 
banks arc penalized and gradually become motivated to make 
more risky loans to keep up with their competitors and to get their 
"fair share" of the fund's protection. Moral hazard, therefore, is 
built right into the system. As with protection against parking 
tickets, the FDIC increases the likelihood that what is being insured 
against will actually happen. It is not a solution to the problem, it is 
part of the problem. 


A true deposit-insurance program which was totally voluntary 
and which geared its rates to the actual risks would be a blessing. 
Banks with solid loans on their books would be able to obtain 
protection for their depositors at reasonable rates, because the 
chances of the insurance company having to pay would be small. 
Banks with unsound loans, however, would have to pay much 
higher rates or possibly would not be able to obtain coverage at any 
price. Depositors, therefore, would know instantly, without need to 
investigate further, that a bank without insurance is not a place 
where they want to put their money. In order to attract deposits, 
banks would have to have insurance. In order to have insurance at 
rates they could afford, they would have to demonstrate to the 
insurance company that their financial affairs are in good order. 
Consequently, banks which failed to meet the minimum standards 
of sound business practice would soon have no customers and 



would be forced out of business. A voluntary, private insurance 
program would act as a powerful regulator of the entire banking 
industry far more effectively and honestly than any political 
scheme ever could. Unfortunately, such is not the banking world of 

The FDIC "protection" is not insurance in any sense of the 
word. It is merely part of a political scheme to bail out the most 
influential members of the banking cartel when they get into 
financial difficulty. As we have already seen, the first line of 
defense in this scheme is to have large, defaulted loans restored to 
life by a Congressional pledge of tax dollars. If that should fail and 
the bank can no longer conceal its insolvency through creative 
bookkeeping, it is almost certain that anxious depositors will soon 
line up to withdraw their money— which the bank does not have. 
The second line of defense, therefore, is to have the FDIC step in 
and make those payments for them. 

Bankers, of course, do not want this to happen. It is a last resort. 
If the bank is rescued in this fashion, management is fired and what 
is left of the business usually is absorbed by another bank. 
Furthermore, the value of the stock will plummet, but this will 
affect the small stockholders only. Those with controlling interest 
and those in management know long in advance of the pending 
catastrophe and are able to sell the bulk of their shares while the 
price is still high. The people who create the problem seldom suffer 
the economic consequences of their actions. 


The FDIC never will have enough money to cover its potential 
liability for the entire banking system. If that amount were in 
existence, it could be held by the banks themselves, and an 
insurance fund would not even be necessary. Instead, the FDIC 
operates on the same assumption as the banks: that only a small 
percentage will ever need money at the same time. So the amount 
held in reserve is never more than a few percentage points of the 
total liability. Typically, the FDIC holds about $1.20 for every $100 
or covered deposits. At the time of this writing, however, that 
figure had slipped to only 70 cents and was still dropping. That 
Weans that the financial exposure is about 99.3% larger than the 
safety net which is supposed to catch it. The failure of just one or 



two large banks in the system could completely wipe out the entire 

And it gets even worse. Although the ledger may show that so 
many millions or billions are in the fund, that also is but creative 
bookkeeping. By law, the money collected from bank assessments 
must be invested in Treasury bonds, which means it is loaned to the 
government and spent immediately by Congress. In the final stage 
of this process, therefore, the FDIC itself runs out of money and 
turns, first to the Treasury, then to Congress for help. This step, of 
course, is an act of final desperation, but it is usually presented in 
the media as though it were a sign of the system's great strength. 
U.S. Neivs & World Report blandly describes it this way: "Should the 
agencies need more money yet, Congress has pledged the full faith 
and credit of the federal government." 1 Gosh, gee whiz. Isn't that 
wonderful? It sort of makes one feel rosy all over to know that the 
fund is so well secured. 

Let's see what "full faith and credit of the federal government" 
actually means. Congress, already deeply in debt, has no money 
either. It doesn't dare openly raise taxes for the shortfall, so it 
applies for an additional loan by offering still more Treasury bonds 
for sale. The public picks up a portion of these I.O.U.s, and the 
Federal Reserve buys the rest. If there is a monetary crisis at hand 
and the size of the loan is great, the Fed will pick up the entire 

But the Fed has no money either. So it responds by creating out of 
nothing an amount of brand new money equal to the I.O.U.s and, 
through the magic of central banking, the FDIC is finally funded. 
This new money gushes into the banks where it is used to pay off 
the depositors. From there it floods through the economy diluting 
the value of all money and causing prices to rise. The old paycheck 
doesn't buy as much any more, so we learn to get along with a little 
bit less. But, see? The bank's doors are open again, and all the 
depositors are happy— until they return to their cars and discover 
the missing hub caps! 

That is what is meant by "the full faith and credit of the federal 

1. "How Safe Are Deposits in Ailing Banks, S&L's?" U.S. News & World Report, 
March 25,1985, p. 73. 




Although national monetary events may appear mysterious 
and chaotic, they are governed by well-established rules which 
bankers and politicians rigidly follow. The central fact to under- 
standing these events is that all the money in the banking system 
has been created out of nothing through the process of making 
loans. A defaulted loan, therefore, costs the bank little of tangible 
value, but it shows up on the ledger as a reduction in assets without 
a corresponding reduction in liabilities. If the bad loans exceed the 
size of the assets, the bank becomes technically insolvent and must 
dose its doors. The first rule of survival, therefore, is to avoid 
writing off large, bad loans and, if possible, to at least continue 
receiving interest payments on them. To accomplish that, the 
endangered loans are rolled over and increased in size. This 
provides the borrower with money to continue paying interest plus 
fresh funds for new spending. The basic problem is not solved, but 
it is postponed for a little while and made worse. 

The final solution on behalf of the banking cartel is to have the 
federal government guarantee payment of the loan should the 
borrower default in the future. This is accomplished by convincing 
Congress that not to do so would result in great damage to the 
economy and hardship for the people. From that point forward, the 
burden of the loan is removed from the bank's ledger and 
transferred to the taxpayer. Should this effort fail and the bank be 
forced into insolvency, the last resort is to use the FDIC to pay off 
the depositors. The FDIC is not insurance, because the presence of 
"moral hazard" makes the thing it supposedly protects against 
more likely to happen. A portion of the FDIC funds are derived 
from assessments against the banks. Ultimately, however, they are 
paid by the depositors themselves. When these funds run out, the 
balance is provided by the Federal Reserve System in the form of 
freshly created new money. This floods through the economy 
causing the appearance of rising prices but which, in reality, is the 
lowering of the value of the dollar. The final cost of the bailout, 
therefore, is passed to the public in the form of a hidden tax called 

So much for the rules of the game. In the next chapter we shall 
look at the scorecard of the actual play itself. 

Chapter Three 


The Game-Called-Bailout as it actually has been 
applied to specific cases including Penn Central, 
Lockheed, Nezv York City, Chrysler, Common- 
wealth Bank of Detroit, First Pennsylvania Bank, 
Continental Illinois, and others. 

In the previous chapter, we offered the whimsical analogy of a 
sporting event to clarify the maneuvers of monetary and political 
scientists to bail out those commercial banks which comprise the 
Federal-Reserve cartel. The danger in such an approach is that it 
could leave the impression the topic is frivolous. So, let us abandon 
the analogy and turn to reality. Now that we have studied the 
hypothetical rules of the game, it is time to check the scorecard of 
the actual play itself, and it will become obvious that this is no 
trivial matter. A good place to start is with the rescue of a 
consortium of banks which were holding the endangered loans of 
Penn Central Railroad. 


Penn Central was the nation's largest railroad with 96,000 
employees and a payroll of $20 million a week. In 1970, it also 
became the nation's biggest bankruptcy. It was deeply in debt to 
just about every bank that was willing to lend it money, and that 
list included Chase Manhattan, Morgan Guaranty, Manufacturers 
Hanover, First National City, Chemical Bank, and Continental 
Illinois. Officers of the largest of those banks had been appointed to 
Penn Central's board of directors as a condition for obtaining 
funds, and they gradually had acquired control over the railroad's 
management. The banks also held large blocks of Penn Central 
stock in their trust departments. 

The arrangement was convenient in many ways, not the least of 
which was that the bankers sitting on the board of directors were 



privy to information, long before the public received it, which 
would affect the market price of Perm Central's stock. Chris Welles, 
in The Last Days of the Club, describes what happened: 

On May 21, a month before the railroad went under, David Bevan, 
Penn Central's chief financial officer, privately informed 
representatives of the company's banking creditors that its financial 
condition was so weak it would have to postpone an attempt to raise 
$100 million in desperately needed operating funds through a bond 
issue. Instead, said Bevan, the railroad would seek some kind of 
government loan guarantee. In other words, unless the railroad could 
manage a federal bailout, it would have to close down. The following 
day, Chase Manhattan's trust department sold 134,300 shares of its 
Penn Central holdings. Before May 28, when the public was informed 
of the postponement of the bond issue, Chase sold another 128,000 
shares. David Rockefeller, the bank's chairman, vigorously denied 
Chase had acted on the basis of inside information. 1 

More to the point of this study is the fact that virtually all of the 
major management decisions which led to Penn Central's demise 
were made by or with the concurrence of its board of directors, 
which is to say, by the banks that provided the loans. In other 
words, the bankers were not in trouble because of Penn Central's 
poor management, they were Penn Central's poor management. An 
investigation conducted in 1972 by Congressman Wright Patman, 
Chairman of the House Banking and Currency Committee, 
revealed the following: The banks provided large loans for disas- 
trous expansion and diversification projects. They loaned addi- 
tional millions to the railroad so it could pay dividends to its 
stockholders. This created the false appearance of prosperity and 
artificially inflated the market price of its stock long enough to 
dump it on the unsuspecting public. Thus, the banker-managers 
were able to engineer a three-way bonanza for themselves. They (1) 
received dividends on essentially worthless stock, (2) earned 
interest on the loans which provided the money to pay those 
dividends, and (3) were able to unload 1.8 million shares of 
stock — after the dividends, of course — at unrealistically high 
prices. 2 Reports from the Securities and Exchange Commission 

1. Chris Welles, TheLast Days of the Club (New York: E.P. Dutton, 1975), pp. 398-99. 

2. "Penn Central," 1977 Congressional Quarterly Almanac (Washington, D.C.: Con- 
gressional Quarterly, 1971), p. 838. 



showed that the company's top executives had disposed of their 
stock in this fashion at a personal savings of more than $1 million. 

Had the railroad been allowed to go into bankruptcy at that 
point and been forced to sell off its assets, the bankers still would 
have been protected. In any liquidation, debtors are paid off first, 
stockholders last; so the manipulators had dumped most of their 
stock while prices were relatively high. That is a common practice 
among corporate raiders who use borrowed funds to seize control 
of a company, bleed off its assets to other enterprises which they 
afco control, and then toss the debt-ridden, dying carcass upon the 
remaining stockholders or, in this case, the taxpayers. 


In his letter of transmittal accompanying the staff report, 
Congressman Patman provided this summary: 

It was as though everyone was a part of a close knit club in which 
Penn Central and its officers could obtain, with very few questions 
asked, loans for almost everything they desired both for the company 
and for their own personal interests, where the bankers sitting on the 
Board asked practically no questions as to what was going on, simply 
allowing management to destroy the company, to invest in 
questionable activities, and to engage in some cases in illegal activities. 
These banks in return obtained most of the company's lucrative 
banking business. The attitude of everyone seemed to be, while the 
game was going on, that all these dealings were of benefit to every 
member of the club, and the railroad and the public be damned. 

The banking cartel, commonly called the Federal Reserve 
System, was created for exactly this kind of bailout. Arthur Burns, 
who was the Fed's chairman, would have preferred to provide a 
direct infusion of newly created money, but that was contrary to 
the rules at that time. In his own words: "Everything fell through. 
We couldn't lend it to them ourselves under the law.... I worked on 
this thing in other ways."" 

The company's cash crisis came to a head over a weekend and, 
in order to avoid having the corporation forced to file for bank- 
ruptcy on Monday morning, Burns called the homes of the heads of 
the Federal Reserve banks around the country and told them to get 

1 "Perm Central: Bankruptcy Filed After Loan Bill Fails," 1970 Congressional 
Quarterly Almanac (Washington, D.C: Congressional Quarterly, 1970), p. 811. 

2 - Quoted by Welles, pp. 404-05. 

3- Quoted by Welles, p. 407. 



the word out immediately that the System was anxious to help. On 
Sunday, William Treiber, who was the first vice-president of the 
New York branch of the Fed, contacted the chief executives of the 
ten largest banks in New York and told them that the Fed's 
Discount Window would be wide open the next morning. Trans- 
lated, that means the Federal Reserve System was prepared to 
create money out of nothing and then immediately loan it to the 
commercial banks so they, in turn, could multiply and re-lend it to 
Perm Central and other corporations, such as Chrysler, which were 
in similar straits. 1 Furthermore, the rates at which the Fed would 
make these funds available would be low enough to compensate 
for the risk, A peaking of what transpired on the following Monday, 
Burns boasted: "I kept the Board in session practically all day to 
change regulation Q so that money could flow into CDs at the 
banks." Looking back at the event, Chris Welles approvingly 
describes it as "what is by common consent the Fed's finest hour." 

Finest hour or not, the banks were not that interested in the 
proposition unless they could be assured the taxpayer would 
co-sign the loans and guarantee payment. So the action inevitably 
shifted back to Congress. Perm Central's executives, bankers, and 
union representatives came in droves to explain how the railroad's 
continued existence was in the best interest of the public, of the 
working man, of the economic system itself. The Navy Department 
spoke of protecting the nation's "defense resources." Congress, of 
course, could not callously ignore these pressing needs of the 
nation. It responded by ordering a retroactive, 13 A per cent pay 
raise for all union employees. After having added that burden to 
the railroad's cash drain and putting it even deeper into the hole, it 
then passed the Emergency Rail Services Act of 1970 authorizing 
$125 million in federal loan guarantees. 3 

None of this, of course, solved the basic problem, nor was it 
really intended to. Almost everyone knew that, eventually, the 
railroad would be "nationalized," which is a euphemism for 
becoming a black hole into which tax dollars disappear. This came 

1. For an explanation of the multiplier effect, see chapter eight, The Mandrake 

2. Welles, pp. 407-08. 

3. "Congress Clears Railroad Aid Bill, Acts on Strike," 2970 Congressional Almanac 
(Washington, D.C.: 1970), pp. 810-16. 



to pass with the creation of AMTRAK in 1971 and CONRAIL in 
1973. AMTRAK took over the passenger services of Penn Central, 
and CONRAIL assumed operation of its freight services, along 
with five other Eastern railroads. CONRAIL technically is a private 
corporation. When it was created, however, 85% of its stock was 
held by the government. The remainder was held by employees. 
Fortunately, the government's stock was sold in a public offering in 
1987. AMTRAK continues under political control and operates at a 
loss. It is sustained by government subsidies — which is to say by 
taxpayers. In 1997, Congress dutifully gave it another $5.7 billion 
and, by 1998, liabilities exceeded assets by an estimated $14 billion. 
CONRAIL, on the other hand, since it was returned to the private 
sector, has experienced an impressive turnaround and has been 
running at a profit — paying taxes instead of consuming them. 


In that same year, 1970, the Lockheed Corporation, which was 
the nation's largest defense contractor, was teetering on the verge 
of bankruptcy. The Bank of America and several smaller banks had 
loaned $400 million to the Goliath and they were not anxious to 
lose the bountiful interest-income stream that flowed from that; nor 
did they wish to see such a large bookkeeping asset disappear from 
their ledgers. In due course, the banks joined forces with Lock- 
heed's management, stockholders, and labor unions, and the group 
descended on Washington. Sympathetic politicians were told that, 
if Lockheed were allowed to fail, 31,000 jobs would be lost, 
hundreds of sub contractors would go down, thousands of suppli- 
ers would be forced into bankruptcy, and national security would 
be seriously jeopardized. What the company needed was to borrow 
more money and lots of it. But, because of its current financial 
predicament, no one was willing to lend. The answer? In the 
interest of protecting the economy and defending the nation, the 
government simply had to provide either the money or the credit. 

A bailout plan was quickly engineered by Treasury Secretary 
John B. Connally which provided the credit. The government 
agreed to guarantee payment on an additional $250 million in 
loans— an amount which would put Lockheed 60% deeper into the 
debt hole than it had been before. But that made no difference now. 
Once the taxpayer had been made a co-signer to the account, the 
banks had no qualms about advancing the funds. 



The not-so-obvious part of this story is that the government 
now had a powerful motivation to make sure Lockheed would be 
awarded as many defense contracts as possible and that those 
contracts would be as profitable as possible. This would be an 
indirect method of paying off the banks with tax dollars, but doing 
so in such a way as not to arouse public indignation. Other defense 
contractors which had operated more efficiently would lose busi- 
ness, but that could not be proven. Furthermore, a slight increase in 
defenses expenditures would hardly be noticed. 

By 1977, Lockheed had, indeed, paid back this loan, and that 
fact was widely advertised as proof of the wisdom and skill of all 
the players, including the referee and the game commissioner. A 
deeper analysis, however, must include two facts. First, there is no 
evidence that Lockheed's operation became more cost efficient 
during these years. Second, every bit of the money used to pay 
back the loans came from defense contracts which were awarded 
by the same government which was guaranteeing those loans. 
Under such an arrangement, it makes little difference if the loans 
were paid back or not. Taxpayers were doomed to pay the bill 
either way. 


Although the government of New York City is not a corpora- 
tion in the usual sense, it functions as one in many respects, 
particularly regarding debt. 

In 1975, New York had reached the end of its credit rope and 
was unable even to make payroll. The cause was not mysterious. 
New York had long been a welfare state within itself, and success 
in city politics was traditionally achieved by lavish promises of 
benefits and subsidies for "the poor." Not surprisingly, the city also 
was notorious for political corruption and bureaucratic fraud. 
Whereas the average large city employed thirty-one people per 
one-thousand residents, New York had forty nine. That's an excess 
of fifty-eight per cent. The salaries of these employees far out- 
stripped those in private industry. While an X-ray technician in a 
private hospital earned $187 per week, a porter working for the city 
earned $203. The average bank teller earned $154 per week, but a 
change maker on the city subway received $212. And municipal 
fringe benefits were fully twice as generous as those in private 
industry within the state. On top of this mountainous overhead 



were heaped additional costs for free college educations, subsi- 
dized housing, free medical care, and endless varieties of welfare 

City taxes were greatly inadequate to cover the cost of this 
Utopia. Even after transfer payments from Albany and Washington 
added state and federal taxes to the take, the outflow continued to 
exceed the inflow. There were now only three options: increase city 
taxes, reduce expenses, or go into debt. The choice was never in 
serious doubt. By 1975, New York had floated so many bonds it 
had saturated the market and could find no more lenders. Two 
bill ion dollars of this debt was held by a small group of banks, 
dominated by Chase Manhattan and Citicorp. 

When the payment of interest on these loans finally came to a 
halt, it was time for serious action. The bankers and the city fathers 
traveled down the coast to Washington and put their case before 
Congress. The largest city in the world could not be allowed to go 
bankrupt, they said. Essential services would be halted and mil- 
lions of people would be without garbage removal, without 
transportation, even without police protection. Starvation, disease, 
and crime would run rampant through the city. It would be a 
disgrace to America. David Rockefeller at Chase Manhattan per- 
suaded his friend Helmut Schmidt, Chancellor of West Germany, 
to make a statement to the media that the disastrous situation in 
New York could trigger an international financial crisis. 

Congress, understandably, did not want to turn New York into 
a zone of anarchy, nor to disgrace America, nor to trigger a 
world-wide financial panic. So, in December of 1975, it passed a bill 
authorizing the Treasury to make direct loans to the city up to $2.3 
billion, an amount which would more than double the size of its 
current debt to the banks. Interest payments on the old debt 
resumed immediately. All of this money, of course, would first 
have to be borrowed by Congress which was, itself, deeply in debt. 
And most of it would be created, directly or indirectly, by the 
Federal Reserve System. That money would be taken from the 
taxpayer through the loss of purchasing power called inflation, but 
at least the banks could be repaid, which is the object of the game. 

There were several restrictions attached to this loan, including 
ari austerity program and a systematic repayment schedule. None 
°f these conditions was honored. New York City has continued to 
be a welfare Utopia, and it is unlikely that it will ever get out of debt. 



By 1978, the Chrysler Corporation was on the verge of bank- 
ruptcy. It had rolled over its debt to the banks many times, and the 
game was nearing an end. In spite of an OPEC oil embargo which 
had pushed up the cost of gasoline and in spite of the increasing 
popularity of small-automobile imports, the company had contin- 
ued to build the traditional gas hog. It was now saddled with a 
mammoth inventory of unsaleable cars and with a staggering debt 
which it had acquired to build those cars. 

The timing was doubly bad. America was also experiencing 
high interest rates which, coupled with fears of U.S. military 
involvement in Cambodia, had led to a slump in the stock market. 
Banks felt the credit crunch keenly and, in one of those rare 
instances in modern history, the money makers themselves were 
scouring for money. 

Chrysler needed additional cash to stay in business. It was not 
interested in borrowing just enough to pay the interest on its 
existing loans. To make the game worth playing, it wanted over a 
billion dollars in new capital. But, in the prevailing economic 
environment, the banks were hard pressed to create anything close 
to that kind of money. 

Managers, bankers, and union leaders found common cause in 
Washington. If one of the largest corporations in America was 
allowed to fold, think of the hardship to thousands of employees 
and their families; consider the damage to the economy as shock 
waves of unemployment move across the country; tremble at the 
thought of lost competition in the automobile matket, of only two 
major brands from which to choose instead of three. 

Well, could anyone blame Congress for not wanting to plunge 
innocent families into poverty nor to upend the national economy 
nor to deny anyone their Constitutional right to freedom-of-choice? 
So a bill was passed directing the Treasury to guarantee up to $1.5 
billion in new loans to Chrysler. The banks agreed to write down 
$600 million of their old loans and to exchange an additional $700 
million for preferred stock. Both of these moves were advertised as 
evidence the banks were taking a terrible loss but were willing to 
yield in order to save the nation. It should be noted, however, that 
the value of the stock which was exchanged for previously uncol- 
lectable debt rose drastically after the settlement was announced to 



the public. Furthermore, not only did interest payments resume on 
the balance of the old loans, but the banks now replaced the written 
down portion with fresh loans, and these were far superior in 
quality because they were fully guaranteed by the taxpayers. So 
valuable was this guarantee that Chrysler, in spite of its previously 
poor debt performance, was able to obtain loans at 10.35% interest 
while its more solvent competitor, Ford, had to pay 13.5%. Apply- 
ing the difference of 3.15% to one and-a-half billion dollars, with a 
declining balance continuing for only six years, produces a savings 
in excess of $165 million. That is a modest estimate of the size of the 
federal subsidy. The real value was far greater because, without it, 
the corporation would have ceased to exist, and the banks would 
have taken a loss of almost their entire loan exposure. 


It will be recalled from the previous chapter that the FDIC is not 
a true insurance program and, because it has been politicized, it 
embodies the principle of moral hazard and it actually increases the 
likelihood that bank failures will occur. 

The FDIC has three options when bailing out an insolvent bank. 
The first is called a payoff. It involves simply paying off the insured 
depositors and then letting the bank fall to the mercy of the 
liquidators. This is the option usually chosen for small banks with 
no political clout. The second possibility is called a sell off, and it 
involves making arrangements for a larger bank to assume all the 
real assets and liabilities of the failing bank. Banking services are 
uninterrupted and, aside from a change in name, most customers 
are unaware of the transaction. This option is generally selected for 
small and medium banks. In both a payoff and a sell off, the FDIC 
takes over the bad loans of the failed bank and supplies the money 
to pay back the insured depositors. 

The third option is called bailout, and this is the one which 
deserves our special attention. Irvine Sprague, a former director of 
the FDIC, explains: "In a bailout, the bank does not close, and 
everyone — insured or not — is fully protected.... Such privileged 
treatment is accorded by FDIC only rarely to an elect few." 1 

That's right, he said everyone — insured or not— is fully pro- 
tected. The banks which comprise the elect few generally are the 

Irvine H. Sprague, Bailout: An Insider's Account of Bank Failures and Rescues (New 
York: Basic Books, 1986), p. 23. 



large ones. It is only when the number of dollars at risk becomes 
mind numbing that a bailout can be camouflaged as protection of 
the public. Sprague says: 

The FDI Act gives the FDIC board sole discretion to prevent a 
bank from failing, at whatever cost. The board need only make the 
finding that the insured bank is in danger of failing and "is essential to 
provide adequate banking service in its community."... FDIC boards 
have been reluctant to make an essentiality finding unless they 
perceive a clear and present danger to the nation's financial system. 1 

Favoritism toward the large banks is obvious at many levels. 
One of them is the fact that, in a bailout, the FDIC covers all 
deposits, whether insured or not. That is significant, because the 
banks pay an assessment based only on their insured deposits. So, if 
uninsured deposits are covered also, that coverage is free — more 
precisely, paid by someone else. What deposits are uninsured? 
Those in excess of $100,000 and those held outside the United 
States. Which banks hold the vast majority of such deposits? The 
large ones, of course, particularly those with extensive overseas 
operations. 2 The bottom line is that the large banks get a whopping 
free ride when they are bailed out. Their uninsured accounts are 
paid by FDIC, and the cost of that benefit is passed to the smaller 
banks and to the taxpayer. This is not an oversight. Part of the plan 
at Jekyll Island was to give a competitive edge to the large banks. 


The first application of the FDIC essentiality rule was, in fact, an 
exception. In 1971, Unity Bank and Trust Company in the Roxbury 
section of Boston found itself hopelessly insolvent, and the federal 
agency moved in. This is what was found: Unity's capital was 
depleted; most of its loans were bad; its loan collection practices 
were weak; and its personnel represented the worst of two worlds: 
overstating and inexperience. The examiners reported that there 
were two persons for every job, and neither one had been taught 
the job. 

With only $11.4 million on its books, the bank was small by 
current standards. Normally, the depositors would have been paid 
back, and the stockholders — like the owners of any other failed 

1. Sprague, pp. 27-29. 

2. The Bank of America is the exception. Despite its size, it has not acquired foreign 
deposits to the same degree as its competitors. 



business venture — would have lost their investment. As Sprague, 
himself, admitted: "If market discipline means anything, stockhold- 
ers should be wiped out when a bank fails. Our assistance would 
have the side effect ... of keeping the stockholders alive at 
government expense." 1 But Unity Bank was different. It was 
located in a black neighborhood and was minority owned. As is 
often the case when government agencies are given discretionary 
powers, decisions are determined more by political pressures than 
by logic or merit, and Unity was a perfect example. In 1971, the 
specter of rioting in black communities still haunted the halls of 
Congress. Would the FDIC allow this bank to fail and assume the 
awesome responsibility for new riots and bloodshed? Sprague 

Neither Wille [another director] nor I had any trouble viewing the 
problem in its broader social context. We were willing to look for a 
creative solution.... My vote to make the "essentiality" finding and 
thus save the little bank was probably foreordained, an inevitable 
legacy of Watts.... The Watts riots ultimately triggered the essentiality 
doctrine. 2 

On July 22, 1971, the FDIC declared that the continued opera- 
tion of Unity Bank was, indeed, essential and authorized a direct 
infusion of $1.5 million. Although appearing on the agency's ledger 
as a loan, no one really expected repayment. In 1976, in spite of the 
FDIC's own staff report that the bank's operations continued "as 
slipshod and haphazard as ever," the agency rolled over the "loan" 
for another five years. Operations did not improve and, on June 30, 
1982, the Massachusetts Banking Commissioner finally revoked 
Unity's charter. There were no riots in the streets, and the FDIC 
quietly wrote off the sum of $4,463,000 as the final cost of the 


The bailout of the Unity Bank of Boston was the exception to 
the rule that small banks are dispensable while the giants must be 
saved at all costs. From that point forward, however, the FDIC 
game plan was strictly according to Hoyle. The next bailout 
occurred in 1972 involving the $1.5 billion Bank of the Common- 
Wealth of Detroit. Commonwealth had funded most of its 

Sprague, pp. 41-42. 
2 - Ibid., p. 48. 



phenomenal growth through loans from another bank, Chase 
Manhattan in New York. When Commonwealth went belly up, 
largely due to securities speculation and self dealing on the part of 
its management, Chase seized 39% of its common stock and 
actually took control of the bank in an attempt to find a way to get 
its money back. FDIC director Sprague describes the inevitable 

Chase officers ... suggested that Commonwealth was a public 
interest problem that the government agencies should resolve. That 
unsubtle hint was the way Chase phrased its request for a bailout by 
the government.... Their proposal would come down to bailing out 
the shareholders, the largest of which was Chase. 1 

The bankers argued that Commonwealth must not be allowed 
to fold because it provided "essential" banking services to the 
community. That was justified on two counts: (1) it served many 
minority neighborhoods and, (2) there were not enough other 
banks in the city to absorb its operation without creating an 
unhealthy concentration of banking power in the hands of a few. It 
was unclear what the minority issue had to do with it inasmuch as 
every neighborhood in which Commonwealth had a branch was 
served by other banks as well. Furthermore, if Commonwealth 
were to be liquidated, many of those branches undoubtedly would 
have been purchased by competitors, and service to the communi- 
ties would have continued. Judging by the absence of attention 
given to this issue during discussions, it is apparent that it was 
merely thrown in for good measure, and no one took it very 

In any event, the FDIC did not want to be accused of being 
indifferent to the needs of Detroit's minorities and it certainly did 
not want to be a destroyer of free-enterprise competition. So, on 
January 17,1972, Commonwealth was bailed out with a $60 million 
loan plus numerous federal guarantees. Chase absorbed some 
losses, primarily as a result of Commonwealth's weak bond 
portfolio, but those were minor compared to what would have 
been lost without FDIC intervention. 

Since continuation of the bank was necessary to prevent 
concentration of financial power, FDIC engineered its sale to the 
First Arabian Corporation, a Luxembourg firm funded by Saudi 

1. Sprague, p. 68. 



princes. Better to have financial power concentrated in Saudi 
Arabia than in Detroit. The bank continued to flounder and, in 
1983, what was left of it was resold to the former Detroit Bank & 
Trust Company, now called Comerica. Thus the dreaded concen- 
tration of local power was realized after all, but not until Chase 
Manhattan was able to walk away from the deal with most of its 
losses covered. 


The 1980 bailout of the First Pennsylvania Bank of Philadelphia 
was next. First Penn was the nation's twenty-third largest bank 
with assets in excess of $9 billion. It was six times the size of 
Commonwealth; nine hundred times larger than Unity. It was also 
the nation's oldest bank, dating back to the Bank of North America 
which was created by the Continental Congress in 1781. 

The bank had experienced rapid growth and handsome profits 
largely due to the aggressive leadership of its chief executive 
officer, John Bunting, who had previously been an economist with 
the Federal Reserve Bank of Philadelphia. Bunting was the epitome 
of the era's go-go bankers. He vastly increased earnings ratios by 
reducing safety margins, taking on risky loans, and speculating in 
the bond market. As long as the economy expanded, these gambles 
were profitable, and the stockholders loved him dearly. When his 
gamble in the bond market turned sour, however, the bank 
plunged into a negative cash flow. By 1979, First Penn was forced 
to sell off several of its profitable subsidiaries in order to obtain 
operating funds, and it was carrying $328 million in questionable 
loans. That was $16 million more than the entire stockholder 
investment. The bank was insolvent, and the time had arrived to hit 
up the taxpayer for the loss. 

The bankers went to Washington and presented their case. 
They were joined by spokesmen from the nation's top three: Bank 
of America, Citibank, and of course the ever-present Chase Man- 
hattan. They argued that, not only was the bailout of First Penn 
essential" for the continuation of banking services in Philadelphia, 
it was also critical to the preservation of world economic stability. 
The bank was so large, they said, if it were allowed to fall, it would 
act as the first domino leading to an international financial crisis. At 
first, the directors of the FDIC resisted that theory and earned the 
angry impatience of the Federal Reserve. Sprague recalls: 



We were far from a decision on how to proceed. There was strong 
pressure from the beginning not to let the bank fail. Besides hearing 
from the bank itself, the other large banks, and the comptroller, we 
heard frequently from the Fed. I recall at one session, Fred Schultz, the 
Fed deputy chairman, argued in an ever rising voice, that there were 
no alternatives — we had to save the bank. He said, "Quit wasting time 
talking about anything else!"... 

The Fed's role as lender of last resort first generated contention 
between the Fed and FDIC during this period. The Fed was lending 
heavily to First Pennsylvania, fully secured, and Fed Chairman Paul 
Volcker said he planned to continue funding indefinitely until we 
could work out a merger or a bailout to save the bank. 

The directors of the FDIC did not want to cross swords with the 
Federal Reserve System, and they most assuredly did not want to 
be blamed for tumbling the entire world economic system by 
allowing the first domino to fall. "The theory had never been 
tested," said Sprague. "I was not sure I wanted it to be just then." 2 
So, in due course, a bailout package was put together which 
featured a $325 million loan from FDIC, interest free for the first 
year and at a subsidized rate thereafter; about half the market rate. 
Several other banks which were financially tied to First Perm, and 
which would have suffered great losses if it had folded, loaned an 
additional $175 million and offered a $1 billion line of credit. FDIC 
insisted on this move to demonstrate that the banking industry 
itself was helping and that it had faith in the venture. To bolster 
that faith, the Federal Reserve opened its Discount Window 
offering low-interest funds for that purpose. 

The outcome of this particular bailout was somewhat happier 
than with the others, at least as far as the bank is concerned. At the 
end of the five-year taxpayer subsidy, the FDIC loan was fully 
repaid. The bank has remained on shaky ground, however, and the 
final page of this episode has not yet been written. 


Everything up to this point was but mere practice for the big 
event which was yet to come. In the early 1980s, Chicago's 
Continental Illinois was the nation's seventh largest bank. With 
assets of $42 billion and with 12,000 employees working in offices 

1. Sprague, pp. 88-89. 

2. Ibid., p. 89. 



in almost every major country in the world, its loan portfolio had 
undergone spectacular growth. Its net income on loans had literally 
doubled in just five years and by 1981 had rocketed to an annual 
figure of $254 million. It had become the darling of the market 
analysts and even had been named by Dun's Review as one of the 
five best managed companies in the country. These opinion leaders 
failed to perceive that the spectacular performance was due, not to 
an expertise in banking or investment, but to the financing of shaky 
business enterprises and foreign governments which could not 
obtain loans anywhere else. But the public didn't know that and 
wanted in on the action. For awhile, the bank's common stock 
actually sold at a premium over others which were more prudently 

The gaudy fabric began to unravel during the Fourth of July 
weekend of 1982 with the failure of the Penn Square Bank in 
Oklahoma. That was the notorious shopping-center bank that had 
booked a billion dollars in oil and gas loans and resold them to 
Continental just before the collapse of the energy market. Other 
loans also began to sour at the same time. The Mexican and 
Argentine debt crisis was coming to a head, and a series of major 
corporate bankruptcies were receiving almost daily headlines. 
Continental had placed large chunks of its easy money with all of 
them. When these events caused the bank's credit rating to drop, 
cautious depositors began to withdraw their funds, and new 
funding dwindled to a trickle. The bank became desperate for cash 
to meet its daily expenses. In an effort to attract new money, it 
began to offer unrealistically high rates of interest on its CDs. Loan 
officers were sent to scour the European and Japanese markets and 
to conduct a public relations campaign aimed at convincing market 
managers that the bank was calm and steady. David Taylor, the 
hank's chairman at that time, said: "We had the Continental Illinois 
Reassurance Brigade and we fanned out all over the world." 1 

In the fantasy land of modern finance, glitter is often more 
important than substance, image more valuable than reality. The 
bank paid the usual quarterly dividend in August, in spite of the 
fact that this intensified its cash crunch. As with the Penn Central 
Railroad twelve years earlier, that move was calculated to project 
an image of business-as-usual prosperity. And the ploy worked — 

Quoted by Chernow, p. 657. 


for a while, at least. By November, the public's confidence had been 
restored, and the bank's stock recovered to its pre-Penn Square 
level. By March of 1983, it had risen even higher. But the worst was 
yet to come. 

By the end of 1983, the bank's burden of non-performing loans 
had reached unbearable proportions and was growing at an 
alarming rate. By 1984, it was $2.7 billion. That same year, the bank 
sold off its profitable credit-card operation to make up for the loss 
of income and to obtain money for paying stockholders their 
expected quarterly dividend. The internal structure was near 
collapse, but the external facade continued to look like business as 

The first crack in that facade appeared at 11:39 AM On 
Tuesday, May 8, Reuters, the British news agency, moved a story 
on its wire service stating that banks in the Netherlands, West 
Germany, Switzerland, and Japan had increased their interest rate 
on loans to Continental and that some of them had begun to 
withdraw their funds. The story also quoted the bank's official 
statement that rumors of pending bankruptcy were "totally prepos- 
terous." Within hours, another wire, the Commodity News Service, 
reported a second rumor: that a Japanese bank was interested in 
buying Continental. 


As the sun rose the following morning, foreign investors began 
to withdraw their deposits. A billion dollars in Asian money 
moved out that first day. The next day — a little more than 
twenty-four hours following Continental's assurance that bank- 
ruptcy was totally preposterous, its long-standing customer, the 
Board of Trade Clearing Corporation, located just down the 
street — withdrew $50 million. Word of the defection spread 
through the financial wire services, and the panic was on. It became 
the world's first global electronic bank run. 

By Friday, the bank had been forced to borrow $3.6 billion from 
the Federal Reserve in order to cover its escaping deposits. A 
consortium of sixteen banks, lead by Morgan Guaranty, offered a 
generous thirty-day line of credit, but all of this was far short of the 
need. Within seven more days, the outflow surged to over 
$6 billion. 



In the beginning, almost all of this action was at the institutional 
level: other banks and professionally managed funds which closely 
monitor every minuscule detail of the financial markets. The 
general public had no inkling of the catastrophe, even as it 
unfolded. Chernow says: "The Continental run was like some 
modernistic fantasy: there were no throngs of hysterical depositors, 
just cool nightmare flashes on computer screens." 1 Sprague writes: 
"Inside the bank, all was calm, the teller lines moved as always, and 
bank officials recall no visible sign of trouble — except in the wire 
room. Here the employees knew what was happening as with- 
drawal order after order moved on the wire, bleeding Continental 
to death. Some cried." 2 

This was the golden moment for which the Federal Reserve and 
the FDIC were created. Without government intervention, Conti- 
nental would have collapsed, its stockholders would have been 
wiped out, depositors would have been badly damaged, and the 
financial world would have learned that banks, not only have to 
talk about prudent management, they actually have to adopt it. 
Future banking practices would have been severely altered, and the 
long-term economic benefit to the nation would have been enor- 
mous. But with government intervention, the discipline of a free 
market is suspended, and the cost of failure or fraud is politically 
passed to the taxpayers. Depositors continue to live in a dream 
world of false security, and banks can operate recklessly and 
fraudulently with the knowledge that their political partners in 
government will come to their rescue when they get into trouble. 


One of the challenges at Continental was that, while only four 
per cent of its liability was covered by FDIC "insurance," the 
regulators felt compelled to cover the entire exposure. Which 
means that the bank paid insurance premiums into the fund based 
on only four per cent of its total coverage, and the taxpayers now 
would pick up the other ninety-six per cent. FDIC director Sprague 

Although Continental Illinois had over $30 billion in deposits, 90 
percent were uninsured foreign deposits or large certificates 
substantially exceeding the $100,000 insurance limit. Off-book 

1- Chemow, p. 658. 

Sprague, p. 153. 



liabilities swelled Continental's real size to $69 billion. In this massive 
liability structure only some $3 billion within the insured limit was 
scattered among 850,000 deposit accounts. So it was in our power and 
entirely legal simply to pay off the insured depositors, let everything 
else collapse, and stand back to watch the carnage. 

That course was never seriously considered by any of the 
players. From the beginning, there were only two questions: how to 
come to Continental's rescue by covering its total liabilities and, 
equally important, how to politically justify such a fleecing of the 
taxpayer. As pointed out in the previous chapter, the rules of the 
game require that the scam must always be described as a heroic 
effort to protect the public. In the case of Continental, the sheer size 
of the numbers made the ploy relatively easy. There were so many 
depositors involved, so many billions at risk, so many other banks 
interlocked, it could be claimed that the economic fabric of the 
entire nation— of the world itself— was at stake. And who could 
say that it was not so. Sprague argues the case in familiar terms: 

An early morning meeting was scheduled for Tuesday, May 15, at 
the Fed. .. We talked over the alternatives. They were few — none 
really.... [Treasury Secretary] Regan and [Fed Chairman] Volcker 
raised the familiar concern about a national banking collapse, that is, a 
chain reaction if Continental should fail. Volcker was worried about an 
international crisis. We all were acutely aware that never before had a 
bank even remotely approaching Continental's size closed. No one 
knew what might happen in the nation and in the world. It was no 
time to find out just for the purpose of intellectual curiosity. 


The bailout was predictable from the start. There would be 
some preliminary lip service given to the necessity of allowing the 
banks themselves to work out their own problem. That would be 
followed by a plan to have the banks and the government share the 
burden. And that finally would collapse into a mere public- 
relations illusion. In the end, almost the entire cost of the bailout 
would be assumed by the government and passed on to the 

At the May 15 meeting, Treasury Secretary Regan spoke 
eloquently about the value of a free market and the necessity of 
having the banks mount their own rescue plan, at least for a part of 

1. Sprague, p. 184. 

2. Ibid., pp. 154-55,183. 



the money. To work out that plan, a summit meeting was arranged 
the next morning among the chairmen of the seven largest banks: 
Morgan Guaranty, Chase Manhattan, Citibank, Bank of America, 
chemical Bank, Bankers Trust, and Manufacturers Hanover. The 
meeting was perfunctory at best. The bankers knew full well that 
the Reagan Administration would not risk the political embarrass- 
ment of a major bank failure. That would make the President and 
the Congress look bad at re-election time. But, still, some kind of 
tokenism was called for to preserve the Administration's conserva- 
tive image. So, with urging from the Fed and the Treasury, the 
consortium agreed to put up the sum of $500 million— an average 
of only $71 million for each, far short of the actual need. Chernow 
describes the plan as "make-believe" and says "they pretended to 
mount a rescue." 1 Sprague supplies the details: 

The bankers said they wanted to be in on any deal, but they did 
not want to lose any money. They kept asking for guarantees. They 
wanted it to look as though they were putting money in but, at the 
same time, wanted to be absolutely sure they were not risking 
anything.... By 7:30 A.M. we had made little progress. We were certain 
the situation would be totally out of control in a few hours. 
Continental would soon be exposing itself to a new business day, and 
the stock market would open at ten o'clock. Isaac [another FDIC 
director] and I held a hallway conversation. We agreed to go ahead 
without the banks. We told Conover [the third FDIC director] the plan 
and he concurred.... 

[Later], we got word from Bernie McKeon, our regional director in 
New York, that the bankers had agreed to be at risk. Actually, the risk 
was remote since our announcement had promised 100 percent 
insurance. 2 

The final bailout package was a whopper. Basically, the govern- 
ment took over Continental Illinois and assumed all of its losses. 
Specifically, the FDIC took $4.5 billion in bad loans and paid 
Continental $3.5 billion for them. The difference was then made up 
by the infusion of $1 billion in fresh capital in the form of stock 
purchase. The bank, therefore, now had the federal government as 

a stockholder controlling 80 per cent of its shares, and its bad loans 
bad been dumped onto the taxpayer. In effect, even though 

1 Chernow, p. 659. 
2 - Sprague, pp. 159-60. 



Continental retained the appearance of a private institution, it had 
been nationalized. 


Perhaps the most important part of the bailout, however, was 
that the money to make it possible was created — directly or 
indirectly— by the Federal Reserve System. If the bank had been 
allowed to fail, and the FDIC had been required to cover the losses, 
the drain would have emptied the entire fund with nothing left to 
cover the liabilities of thousands of other banks. In other words, 
this one failure alone, if it were allowed to happen, would have 
wiped out the entire FDIC! That's one reason the bank had to be 
kept operating, losses or no losses, and that's why the Fed had to be 
involved in the bail out. In fact, that was precisely the reason the 
System was created at Jekyll Island: to manufacture whatever 
amount of money might be necessary to cover the losses of the 
cartel. The scam could never work unless the Fed was able to create 
money out of nothing and pump it into the banks along with 
"credit" and "liquidity" guarantees. Which means, if the loans go 
sour, the money is eventually extracted from the American people 
through the hidden tax called inflation. That's the meaning of the 
phrase "lender of last resort." 

FDIC director Irvine Sprague, while discussing the press re- 
lease which announced the Continental bail-out package, describes 
the Fed's role this way: 

The third paragraph ... granted 100 percent insurance to all 
depositors, including the uninsured, and all general creditors.... The 
next paragraph ... set forth the conditions under which the Fed, as 
lender of last resort, would make its loans.... The Fed would lend to 
Continental to meet "any extraordinary liquidity requirements." That 
would include another run. All agreed that Continental could not be 
saved without 100 percent insurance by FDIC and unlimited liquidity 
support by the Federal Reserve. No plan would work without these 
two elements. 1 

By 1984, "unlimited liquidity support" had translated into the 
staggering sum of $8 billion. By early 1986, the figure had climbed 
to $9.24 billion and was still rising. While explaining this fleecing of 
the taxpayer to the Senate Banking Committee, Fed Chairman Paul 
Volcker said: "The operation is the most basic function of the 

1. Sprague, pp. 162-63. 



Federal Reserve. It was why it was founded." 1 With those words, 
he has confirmed one of the more controversial assertions of this 


It has been mentioned previously that the large banks receive a 
free ride on their FDIC coverage at the expense of the small banks. 
There could be no better example of this than the bail out of 
Continental Illinois. In 1983, the bank paid a premium into the fund 
of only $6.5 million to protect its insured deposits of $3 billion. The 
actual liability, however — including its institutional and overseas 
deposits— was ten times that figure, and the FDIC guaranteed 
payment on the whole amount. As Sprague admitted, "Small banks 
pay proportionately far more for their insurance and have far less 
chance of a Continental-style bailout." 2 

How true. Within the same week that the FDIC and the Fed 
were providing billions in payments, stock purchases, loans, and 
guarantees for Continental Illinois, it closed down the tiny Bledsoe 
County Bank of Pikeville, Tennessee, and the Planters Trust and 
Savings Bank of Opelousas, Louisiana. During the first half of that 
year, forty-three smaller banks failed without an FDIC bailout. In 
most cases, a merger was arranged with a larger bank, and only the 
uninsured deposits were at risk. The impact of this inequity upon 
the banking system is enormous. It sends a message to bankers and 
depositors alike that small banks, if they get into trouble, will be 
allowed to fold, whereas large banks are safe regardless of how 
poorly or fraudulently they are managed. As a New York invest- 
ment analyst stated to news reporters, Continental Illinois, even 
though it had just failed, was "obviously the safest bank in the 
country to have your money in." 3 Nothing could be better calcu- 
lated to drive the small independent banks out of business or to 
force them to sell out to the giants. And that, in fact, is exactly what 
has been happening. Since 1984, while hundreds of small banks 
have been forced out of business, the average size of the banks 
which remain — with government protection — has more than 
doubled. It will be recalled that this advantage of the big banks 

p~Quoted by Greider, p. 628. 
~ Sprague, p. 250. 

New Continental Illinois Facing Uncertain Future," by Keith E. Leighty, Asso- 
ciated Press, Thousand Oaks, Calif., News Chronicle, May 13, 1985, p. 18. 


over their smaller competitors was also one of the objectives of the 
Jekyll Island plan. 

Perhaps the most interesting — and depressing — aspect of the 
Continental Illinois bailout was the lack of public indignation over 
the principle of using taxes and inflation to protect the banking 
industry. Smaller banks have complained of the unfair advantage 
given to the larger banks, but not on the basis that the government 
should have let the giant fall. Their lament was that it should now 
protect them in the same paternalistic fashion. Voters and politi- 
cians were silent on the issue, apparently awed by the sheer size of 
the numbers and the specter of economic chaos. Decades of public 
education had left their mark. After all, wasn't this exactly what 
government schools have taught is the proper function of govern- 
ment? Wasn't this the American way? Even Ronald Reagan, 
viewed as the national champion of economic conservatism, 
praised the action. From aboard Air Force One on the way to 
California, the President said: "It was a thing that we should do and 
we did it. It was in the best interest of all concerned." 1 

The Reagan endorsement brought into focus one of the most 
amazing phenomena of the 20th century: the process by which 
America has moved to the Left toward statism while marching 
behind the political banner of those who speak the language of 
opposing statism. William Greider, a former writer for the liberal 
Washington Post and The Rolling Stone, complains: 

The nationalization of Continental was, in fact, a quintessential act 
of modem liberalism — the state intervening in behalf of private 
interests and a broad public purpose. In this supposedly conservative 
era, federal authorities were setting aside the harsh verdict of market 
competition (and grossly expanding their own involvement in the 
private economy).... 

In the past, conservative scholars and pundits had objected loudly 
at any federal intervention in the private economy, particularly 
emergency assistance for failing companies. Now, they hardly seemed 
to notice. Perhaps they would have been more vocal if the deed had 
been done by someone other than the conservative champion, Ronald 
Reagan. 2 

Four years after the bailout of Continental Illinois, the same 
play was used in the rescue of BankOklahoma, which was a bank 

1. "Reagan Calls Rescue of Bank No Bailout," New York Times, July 29,1984. 

2. Greider, p. 631. 



holding company. The FDIC pumped $130 million into its main 
banking unit and took warrants for 55% ownership. The pattern 
had been set. By accepting stock in a failing bank in return for 
bailing it out, the government had devised an ingenious way to 
nationalize banks without calling it that. Issuing stock sounds like a 
business transaction in the private sector. And the public didn't 
seem to notice the reality that Uncle Sam was going into banking. 


A sober evaluation of this long and continuing record leads to 
the second reason for abolishing the Federal Reserve System: Far 
from being a protector of the public, it is a cartel operating against the 
public interest. 


The game called bailout is not a whimsical figment of the 
imagination, it is for real. Here are some of the big games of the 
season and their final scores. 

In 1970, Penn Central railroad became bankrupt. The banks 
which loaned the money had taken over its board of directors and 
had driven it further into the hole, all the while extending bigger 
and bigger loans to cover the losses. Directors concealed reality 
from the stockholders and made additional loans so the company 
could pay dividends to keep up the false front. During this time, 
the directors and their banks unloaded their stock at unrealistically 
high prices. When the truth became public, the stockholders were 
left holding the empty bag. The bailout, which was engineered by 
the Federal Reserve, involved government subsidies to other banks 
to grant additional loans. Then Congress was told that the collapse 
of Penn Central would be devastating to the public interest. 
Congress responded by granting $125 million in loan guarantees so 
that banks would not be at risk. The railroad eventually failed 
anyway, but the bank loans were covered. Penn Central was 
nationalized into AMTRAK and continues to operate at a loss. 

In 1970, as Lockheed faced bankruptcy, Congress heard 
essentially the same story. Thousands would be unemployed, 
subcontractors would go out of business, and the public would 
suffer greatly. So Congress agreed to guarantee $250 million in new 
loans, which put Lockheed 60% deeper into debt than before. Now 
that government was guaranteeing the loans, it had to make sure 
Lockheed became profitable. This was accomplished by granting 



lucrative defense contracts at non-competitive bids. The banks 
were paid back. 

In 1975, New York City had reached the end of its credit rope. It 
had borrowed heavily to maintain an extravagant bureaucracy and 
a miniature welfare state. Congress was told that the public would 
be jeopardized if city services were curtailed, and that America 
would be disgraced in the eyes of the world. So Congress author- 
ized additional direct loans up to $2.3 billion, which more than 
doubled the size of the current debt. The banks continued to receive 
their interest. 

In 1978, Chrysler was on the verge of bankruptcy. Congress 
was informed that the public would suffer greatly if the company 
folded, and that it would be a blow to the American way if 
freedom-of-choice were reduced from three to two makes of 
automobiles. So Congress guaranteed up to $1.5 billion in new 
loans. The banks reduced part of their loans and exchanged another 
portion for preferred stock. News of the deal pushed up the market 
value of that stock and largely offset the loan write-off. The banks' 
previously uncollectable debt was converted into a government- 
backed, interest-bearing asset. 

In 1972, the Commonwealth Bank of Detroit— with $1.5 billion 
in assets, became insolvent. It had borrowed heavily from the 
Chase Manhattan Bank in New York to invest in high-risk and 
potentially high-profit ventures. Now that it was in trouble, so was 
Chase. The bankers went to Washington and told the FDIC the 
public must be protected from the great financial hardship that 
would follow if Commonwealth were allowed to close. So the FDIC 
pumped in a $60 million loan plus federal guarantees of repay- 
ment. Commonwealth was sold to an Arab consortium. Chase took 
a minor write down but converted most of its potential loss into 
government-backed assets. 

In 1979, the First Pennsylvania Bank of Philadelphia became 
insolvent. With assets in excess of $9 billion, it was nine-times the 
size of Commonwealth. It, too, had been an aggressive player in the 
'80s. Now the bankers and the Federal Reserve told the FDIC that 
the public must be protected from the calamity of a bank failure of 
this size, that the national economy was at stake, perhaps even the 
entire world. So the FDIC gave a $325 million loan— interest-free 
for the first year, and at half the market rate thereafter. The Federal 
Reserve offered money to other banks at a subsidized rate for the 



specific purpose of relending to First Perm. With that enticement, 
they advanced $175 million in immediate loans plus a $1 billion 
line of credit. 

In 1982, Chicago's Continental Illinois became insolvent. It was 
the nation's seventh largest bank with $42 billion in assets. The 
previous year, its profits had soared as a result of loans to high-risk 
business ventures and foreign governments. Although it had been 
the darling of market analysts, it quickly unraveled when its cash 
flow turned negative, and overseas banks began to withdraw 
deposits. It was the world's first electronic bank run. Federal 
Reserve Chairman Volcker told the FDIC that it would be unthink- 
able to allow the world economy to be ruined by a bank failure of 
this magnitude. So, the FDIC assumed $4.5 billion in bad loans and, 
in return for the bailout, took 80% ownership of the bank in the 
form of stock. In effect, the bank was nationalized, but no one 
called it that. The United States government was now in the 
banking business. 

All of the money to accomplish these bailouts was made 
possible by the Federal Reserve System acting as the "lender of last 
resort." That was one of the purposes for which it had been created. 
We must not forget that the phrase "lender of last resort" means 
that the money is created out of nothing, resulting in the confisca- 
tion of our nation's wealth through the hidden tax called inflation. 

Chapter Four 


The history of increasing government interven- 
tion in the housing industry; the stifling of 
free-market forces in residential real estate; the 
residting crisis in the S&L industry; the bailout of 
that industry with money taken from the tax- 

As we have seen in previous chapters, the damage done by the 
banking cartel is made possible by the fact that money can be 
created out of nothing. It also destroys our purchasing power 
through the hidden tax called inflation. The mechanism by which it 
works is hidden and subtle. 

Let us turn, now, from the arcane world of central banking to 
the giddy world of savings-and-loan institutions. By comparison, 
the problem in the savings-and-loan industry is easy to compre- 
hend. It is simply that vast amounts of money are disappearing into 
the black hole of government mismanagement, and the losses must 
eventually be paid by us. The end result is the same in both cases. 


It all began with a concept. The concept took root in America 
largely as a result of the Great Depression of the 1930s. American 
politicians were impressed at how radical Marxists were able to 
attract popular support by blaming the capitalist system for the 
country's woes and by promising a socialist Utopia. They admired 
and feared these radicals; admired them for their skill at mass 
psychology; feared them lest they become so popular as to win a 
plurality at the ballot box. It was not long before many political 
figures began to mimic the soap-box orators, and the voters 
enthusiastically put them into office. 

While the extreme and violent aspects of Communism gener- 
ally were rejected, the more genteel theories of socialism became 
Popular among the educated elite. It was they who would naturally 
become the leaders in an American socialist system. Someone had 


to look after the masses and tell them what to do for their own 
good, and many with college degrees and those with great wealth 
became enamored by the thought of playing that role. And so, the 
concept became widely accepted at all levels of American life— the 
"downtrodden masses" as well as the educated elite — that it was 
desirable for the government to take care of its citizens and to 
protect them in their economic affairs. 

And so, when more than 1900 S&Ls went belly-up in the Great 
Depression, Herbert Hoover— and a most willing Congress — 
created the Federal Home Loan Bank Board to protect depositors in 
the future. It began to issue charters to institutions that would 
submit to its regulations, and the public was led to believe that 
government regulators would be more wise, prudent, and honest 
than private managers. A federal charter became a kind of govern- 
ment seal of approval. The public, at last, was being protected. 

Hoover was succeeded by FDR in the White House who 
became the epitome of the new breed. Earlier in his political career, 
he had been the paragon of free enterprise and individualism. He 
spoke out against big government and for the free market, but in 
mid life he reset his sail to catch the shifting political wind. He went 
down in history as a pioneer of socialism in America. 

It was FDR who took the next step toward government 
paternalism in the S&L industry— as well as the banking indus- 
try—by establishing the Federal Deposit Insurance Corporation 
(FDIC) and the Federal Saving and Loan Insurance Corporation 
(FSLIC). From that point forward, neither the public nor the 
managers of the thrifts needed to worry about losses. Everything 
would be reimbursed by the government. 


At about the same time, loans on private homes became 
subsidized through the Federal Housing Authority (FHA) which 
allowed S&Ls to make loans at rates lower than would have been 
possible without the subsidy. This was to make it easier for 
everyone to realize the dream of having their own home. While the 
Marxists were promising a chicken in every pot, the New Dealers 
were winning elections by pushing for a house on every lot. 

In the beginning, many people were able to purchase a home 
who, otherwise, might not have been able to do so or who would 
have had to wait longer to accumulate a higher down payment. On 



the ether hand, the FHA-induced easy credit began to push up the 
price of houses for the middle class, and that quickly offset any real 
advantage of the subsidy. The voters, however, were not perceptive 
enough to understand this canceling effect and continued to vote 
for politicians who promised to expand the system. 

The next step was for the Federal Reserve Board to require 
banks to offer interest rates lower than those offered by S&Ls. The 
result was that funds moved from the banks into the S&Ls and 
became abundantly available for home loans. This was a deliberate 
national policy to favor the home industry at the expense of other 
industries that were competing for the same investment dollars. It 
may not have been good for the economy as a whole but it was 
good politics. 


These measures effectively removed real estate loans from the 
free market and placed them into the political arena, where they 
have remained ever since. The damage to the public as a result of 
this intervention would be delayed a long time in coming, but 
when it came, it would be cataclysmic. 

The reality of government disruption of the free market cannot 
be overemphasized, for it is at the heart of our present and future 
crisis. We have savings institutions that are controlled by govern- 
ment at every step of the way. Federal agencies provide protection 
against losses and lay down rigid guidelines for capitalization 
levels, number of branches, territories covered, management poli- 
cies, services rendered, and interest rates charged. The additional 
cost to S&Ls of compliance with this regulation has been estimated 
by the American Bankers Association at about $11 billion per year, 
which represents a whopping 60% of all their profits. 

On top of that, the healthy component of the industry must 
spend over a billion dollars each year for extra premiums into the 
so-called insurance fund to make up for the failures of the 
unhealthy component, a form of penalty for success. When some of 
the healthy institutions attempted to convert to banks to escape this 
Penalty, the regulators said no. Their cash flow was needed to 
support the bailout fund. 


The average private savings deposit is about $6,000. Yet, under 
the Carter administration, the level of FDIC insurance was raised 



from $40,000 to $100,000 for each account. Those with more than 
that merely had to open several accounts, so, in reality, the sky was 
the limit. Clearly this had nothing to do with protecting the 
common man. The purpose was to prepare the way for brokerage 
houses to reinvest huge blocks of capital at high rates of interest 
virtually without risk. It was, after all, insured by the federal 

In 1979, Federal Reserve policy had pushed up interest rates, 
and the S&Ls had to keep pace to attract deposits. By December of 
1980, they were paying 15.8% interest on their money-market 
certificates. Yet, the average rate they were charging for new 
mortgages was only 12.9%. Many of their older loans were still 
crunching away at 7 or 8% and, to compound the problem, some of 
those were in default, which means they were really paying 0%. 
The thrifts were operating deep in the red and had to make up the 
difference somewhere. 

The weakest S&Ls paid the highest interest rates to attract 
depositors and they are the ones which obtained the large blocks of 
brokered funds. Brokers no longer cared how weak the operation 
was, because the funds were fully insured. They just cared about 
the interest rate. 

On the other hand, the S&L managers reasoned that they had to 
make those funds work miracles for the short period they had 
them. It was their only chance to dig out, and they were willing to 
take big risks. For them also, the government's insurance program 
had removed any chance of loss to their depositors, so many of 
them plunged into high-profit, high-risk real-estate developments. 

Deals began to go sour, and 1979 was the first year since the 
Great Depression of the 1930s that the total net worth of federally 
insured S&Ls became negative. And that was despite expansion 
almost everywhere else in the economy. The public began to 


The protectors in Washington responded in 1982 with a joint 
resolution of Congress declaring that the full faith & credit of the 
United States government stood behind the FSLIC. That was a 
reassuring phrase, but many people had the gnawing feeling that, 
somehow, we were going to pay for it ourselves. And they were 
right. Consumer Reports explained: 



Behind the troubled banks and the increasingly troubled 
insurance agencies stands "the full faith and credit" of the 
Government— in effect, a promise, sure to be honored by Congress, 
that all citizens will chip in through taxes or through inflation to make 
ail depositors whole. 

The plight of the S&Ls was dramatically brought to light in 
Ohio in 1985 when the Home State Savings Bank of Cincinnati 
collapsed as a result of a potential $150 million loss in a Horida 
securities firm. This triggered a run, not only on the thirty-three 
branches of Home State, but on many of the other S&Ls as well. The 
news impacted international markets where overseas speculators 
dumped paper dollars for other currencies, and some rushed to 
buy gold. 

Within a few days, depositors demanding their money caused 
$60 million to flow out of the state's $130 million "insurance" fund 
which, true to form for all government protection schemes, was 
terribly inadequate. If the run had been allowed to continue, the 
fund likely would have been obliterated the next day. It was time 
for a political fix. 

On March 15, Ohio Governor Richard Celeste declared one of 
the few "bank holidays" since the Great Depression and closed all 
seventy-one of the state-insured thrifts. He assured the public there 
was nothing to worry about. He said this was merely a "cooling-off 
period ... until we can convincingly demonstrate the soundness of 
our system." Then he flew to Washington and met with Paul 
Volcker, chairman of the Federal Reserve Board, and with Edwin 
Gray, chairman of the Federal Home Loan Bank Board, to request 
federal assistance. They assured him it was available. 

A few days later, depositors were authorized to withdraw up to 
$750 from their accounts. On March 21, President Reagan calmed 
the world money markets with assurances that the crisis was over. 
Furthermore, he said, the problem was "limited to Ohio." 2 

This was not the first time there had been a failure of state- 
sponsored insurance funds. The one in Nebraska was pulled down 
in when the Commonwealth Savings Company of Lincoln 

failed. It had over $60 million in deposits, but the insurance fund 

1- "How Safe Are Your Deposits?", Consumer Reports, August, 1988, p. 503. 

Ohio Bank Crisis That Ruffled World," U.S. News & World Report, April 1,1985, 



had less than $2 million to cover, not just Commonwealth, but the 
whole system. Depositors were lucky to get 65 cents on the dollar, 
and even that was expected to take up to 10 years. 1 


In the early days of the Reagan administration, government 
regulations were changed so that the S&Ls were no longer 
restricted to the issuance of home mortgages, the sole reason for 
their creation in the first place. In fact, they no longer even were 
required to obtain a down payment on their loans. They could now 
finance 100% of a deal— or even more. Office buildings and 
shopping centers sprang up everywhere regardless of the need. 
Developers, builders, managers, and appraisers made millions. The 
field soon became overbuilt and riddled with fraud. Billions of 
dollars disappeared into defunct projects. In at least twenty-two of 
the failed S&Ls, there is evidence that the Mafia and CIA were 

Fraud is not necessarily against the law. In fact, most of the 
fraud in the S&L saga was, not only legal, it was encouraged by the 
government. The Garn-St. Germain Act allowed the thrifts to lend 
an amount of money equal to the appraised value of real estate 
rather than the market value. It wasn't long before appraisers were 
receiving handsome fees for appraisals that were, to say the least, 
unrealistic. But that was not fraud, it was the intent of the 
regulators. The amount by which the appraisal exceeded the 
market value was defined as "appraised equity" and was counted 
the same as capital. Since the S&Ls were required to have $1 in 
capital for every $33 held in deposits, an appraisal that exceeded 
market value by $1 million could be used to pyramid $33 million in 
deposits from Wall Street brokerage houses. And the anticipated 
profits from those funds was one of the ways in which the S&Ls 
were supposed to recoup their losses without the government 
having to cough up the money— which it didn't have. In effect the 
government was saying: "We can't make good on our protection 
scheme, so go get the money yourself by putting the investors at 
risk. Not only will we back you up if you fail, we'll show you 
exactly how to do it." 

1. "How Safe Are Deposits in Ailing Banks, S&Ls?," U.S. News & World Report, 
March 25,1985, p. 74. 




In spite of the accounting gimmicks which were created to 
make the walking-dead S&Ls look healthy, by 1984 the fallout 
began- The FSLIC closed one institution that year and arranged for 
the merger of twenty-six others which were insolvent. In order to 
persuade healthy firms to absorb insolvent ones, the government 
provides cash settlements to compensate for the liabilities. By 1984, 
these subsidized mergers were costing the FDIC over $1 billion per 
year. Yet, that was just the small beginning. 

Between 1980 and 1986, a total of 664 insured S&Ls failed. 
Government regulators had promised to protect the public in the 
event of losses, but the losses were already far beyond what they 
could handle. They could not afford to close down all the insolvent 
thrifts because they simply didn't have enough money to cover the 
pay out. In March of 1986, the FSLIC had only 3 cents for every 
dollar of deposits. By the end of that year, the figure had dropped 
to two-tenths of a penny for each dollar "insured." Obviously, they 
had to keep those thrifts in business, which meant they had to 
invent even more accounting gimmicks to conceal the reality. 

Postponement of the inevitable made matters even worse. 
Keeping the S&Ls in business was costing the FSLIC $6 million per 
day. By 1988, two years later, the thrift industry as a whole was 
losing $9.8 million per day, and the unprofitable ones — the corpses 
which were propped up by the FSLIC — were losing $35.6 million 
per day. And, still, the game continued. 

By 1989, the FSLIC no longer had even two-tenths of a penny 
for each dollar insured. Its reserves had vanished altogether. Like 
the thrifts it supposedly protected, it was, itself, insolvent and 
looking for loans. It had tried offering bond issues, but these fell far 
short of its needs. Congress had discussed the problem but had 
failed to provide new funding. The collapse of Lincoln Savings 
brought the crisis to a head. There was no money, period. 

In February, an agreement was reached between Alan 
Greenspan, Chairman of the Federal Reserve Board, and M. Danny 
Wall, Chairman of the Federal Home Loan Bank Board, to have 

l "Filling FSLIC," by Shirley Hobbs Scheibla, Barron's, Feb. 9,1987, p. 16. 



$70 million of bailout funding for Lincoln Savings come directly 
from the Federal Reserve. 

This was a major break in precedent. Historically, the Fed has 
served to create money only for the government or for banks. If it 
were the will of the people to bail out a savings institution, then it is 
up to Congress to approve the funding. If Congress does not have 
the money or cannot borrow it from the public, then the Fed can 
create it (out of nothing, of course) and give it to the government. 
But, in this instance, the Fed was usurping the role of Congress and 
making political decisions entirely on its own. There is no basis in 
the Federal Reserve Act for this action. Yet, Congress remained 
silent, apparently out of collective guilt for its own paralysis. 

Finally, in August of that year, Congress was visited by the 
ghost of FDR and sprang into action. It passed the Financial 
Institutions Reform and Recovery Act (FIRREA) and allocated a 
minimum of $66 billion for the following ten years, $300 billion 
over thirty years. Of this amount, $225 billion was to come from 
taxes or inflation, and $75 billion was to come from the healthy 
S&Ls. It was the biggest bailout ever, bigger than the combined cost 
for Lockheed, Chrysler, Penn Central, and New York City. 

In the process, the FSLIC was eliminated because it was 
hopelessly insolvent and replaced by the Savings Association 
Insurance Fund. Also created was the Banking Insurance Fund for 
the protection of commercial banks, and both are now adminis- 
tered by the FDIC. 

As is often the case when previous government control fails to 
produce the desired result, the response of Congress is to increase 
the controls. Four entirely new layers of bureaucracy were added to 
the existing tangled mess: the Resolution Trust Oversight Board, to 
establish strategies for the RTC; the Resolution Funding Corpora- 
tion, to raise money to operate the RTC; The Office of Thrift 
Supervision, to supervise thrift institutions even more than they 
had been; and the Oversight Board for the Home Loan Banks, the 
purpose of which remains vague but probably is to make sure that 
the S&Ls continue to serve the political directive of subsidizing the 
home industry. When President Bush signed the bill, he said: 

This legislation will safeguard and stabilize America's financial 
system and put in place permanent reforms so these problems will 
never happen again. Moreover, it says to tens of millions of 
savings-and-loan depositors, "You will not be the victim of others' 



mistak|s. We will see — guarantee — that your insured deposits are secure. 
secure 7 . 


By the middle of the following year, it was clear that the $66 
billion funding would be greatly inadequate. Treasury spokesmen 
were now quoting $130 billion, about twice the original estimate. 
How much is $130 billion? In 1990, it was 30% more than the 
salaries of all the schoolteachers in America. It was more than the 
combined profits of all the Fortune-500 industrial companies. It 
would send 1.6 million students through the best four-year col- 
leges, including room and board. And the figure did not even 
include the cost of liquidating the huge backlog of thrifts already 
seized nor the interest that had to be paid on borrowed funds. 
Within only a few days of the announced increase, the Treasury 
again revised the figure upward from $130 billion to $150 billion. 
As Treasury Secretary Nicholas Brady told the press, "No one 
should assume that the estimates won't change. They will." 

Indeed, the estimates continued to change with each passing 
week. The government had sold or merged 223 insolvent thrifts 
during 1988 and had given grossly inadequate estimates of the cost. 
Financiers such as Ronald Perelman and the Texas investment 
partnership called Temple-Inland, Inc., picked up many of these at 
fantastic bargains, especially considering that they were given cash 
subsidies and tax advantages to sweeten the deal. At the time, 
Danny Wall, who was then Chairman of the Federal Home Loan 
Bank Board, announced that these deals "took care" of the worst 
thrift problems. He said the cost of the bailout was $39 billion. The 
Wall Street Journal replied: 

Wrong again. The new study, a compilation of audits prepared by 
the Federal Deposit Insurance Corporation, indicates that the total cost 
of the so-called Class of '88 will be $90 billion to $95 billion, including 
fax benefits granted the buyers and a huge amount of interest on 
government debt to help finance this assistance.... 

But the 1988 thrift rescues' most expensive flaw doesn't appear to 
be the enrichment of tycoons. Rather it's that none of the deals ended 
or even limited the government's exposure to mismanagement by the 
new owners, hidden losses on real estate in the past, or the vicissitudes 
of the real-estate markets in the future.... And some of the deals 

1- "Review of the News," The New American, Sept. 11,1989, p. 15. 



appear to be sham transactions, in which failing thrifts were sold to 
failing thrifts, which are failing all over again.... 

Although the thrifts proved to be in far worse shape than the Bank 
Board estimated, Mr. Wall defends his strategy for rescuing them with 
open-ended assistance. "We didn't have the money to liquidate," he 
says. 1 

When Congress passed HRREA the previous year to "safe- 
guard and stabilize America's financial system," the staggering 
sum of $300 billion dollars was authorized to be taken from taxes 
and inflation over the following thirty years to do the job. Now, 
Federal Reserve Chairman Alan Greenspan was saying that the 
true long-term cost would stand at $500 billion, an amount even 
greater than the default of loans to all the Third- World countries 
combined. The figure was still too low. A non-biased private study 
released by Veribank, Inc. showed that, when all the hidden costs 
are included, the bill presented to the American people will be 
about $532 billion. 2 The problems that President Bush promised 
would "never happen again" were happening again. 


Long before this point, the real estate market had begun to 
contract, and many mortgages exceeded the actual price for which 
the property could be sold. Furthermore, market interest rates had 
risen far above the rates that were locked into most of the S&L 
loans, and that decreased the value of those mortgages. The true 
value of a $50,000 mortgage that is paying 7% interest is only half of 
a $50,000 mortgage that is earning 14%. So the protectors of the 
public devised a scheme whereby the S&Ls were allowed to value 
their assets according to the original loan value rather than their 
true market value. That helped, but much more was still needed. 

The next step was to create bookkeeping assets out of thin air. 
This was accomplished by authorizing the S&Ls to place a mone- 
tary value on community "good will"! With the mere stroke of a 
pen, the referees created $2.5 billion in such assets, and the players 
continued the game. 

1. "Audit Report by FDIC Shows Wall's Estimates for Thrift Bailouts in 1988 Were 
Wildly Low," by Charles McCoy and Todd Mason, The Wall Street journal, Sept. 14, 
1990, p. A-12. 

2. "S&L Industry Rebuilds As Bailout Reaches Final Phase," VeribankNews Release, 
Veribank, Inc. (Wakefield, Massachusetts), January 12,1994, p. 2. 



Then the FSLIC began to issue "certificates of net worth," which 
were basically promises to bail out the ailing S&Ls should they 
need it- The government had already promised to do that but, by 
printing it on pieces of paper and calling them "certificates of net 
worth," the S&Ls were allowed to count them as assets on their 
books. Such promises are assets but, since the thrifts would be 
obligated to pay back any money it received in a bailout, those 
pay-back obligations should also have been put on the books as 
liabilities. The net position would not change. The only way they 
could count the certificates as assets without adding the offsetting 
liabilities would be for the bailout promises to be outright gifts with 
no obligation to ever repay. That may be the eventual result, but it 
is not the way the plan was set up. In any event, the thrifts were 
told they could count these pieces of paper as capital, the same as if 
the owners had put up their own cash. And the game continued. 

The moment of truth arrives when the S&Ls have to liquidate 
some of their holdings, such as in the sale of their mortgages or 
foreclosed homes to other S&Ls, commercial banks, or private 
parties. That is when the inflated bookkeeping value is converted 
into the true market value, and the difference has to be entered into 
the ledger as a loss. But not in the never-never land of socialism 
where government is the great protector. Dennis Turner explains: 

The FSUC permits the S&L which sold the mortgage to take the 
loss over a 40-year period. Most companies selling an asset at a loss 
must take the loss immediately: only S&Ls can engage in this patent 
fraud. Two failing S&Ls could conceivably sell their lowest-yielding 
mortgages to one another, and both would raise their net worth! This 

dishonest accounting in the banking system is approved by the highest 
regulatory authorities. 1 

U.S. News & World Report continues the commentary: 

Today, scores of savings-and-loan associations, kept alive mainly 
by accounting gimmicks, continue to post big losses.... Only a fraction 
of the industry's aggregate net worth comprises hard assets such as 
mortgage notes. Intangible assets, which include bookkeeping entries 
such as good will, make up nearly all of the industry's estimated net 
Worth of 37.6 billion dollars. 2 

p tennis Turner, When Your Bank Fails (Princeton, New Jersey: Amwell 
publishing, Inc., 1983), p. 141. 

W ? r sTouch AndCo for Troubled S&Ls," by Patricia M. Scherschel, U.S. Neivs & 
orut Report, March 4,1985, p. 92. 



We must keep in mind that a well managed institution would 
never assume these kinds of risks or resort to fraudulent 
accounting if it wanted to stay in business for the long haul. But 
with Washington setting guidelines and standing by to make up 
losses, a manager would be fired if he didn't take advantage of the 
opportunity. After all, Congress specifically said it was OK when it 
passed the laws. These were loopholes deliberately put there to be 
used. Dr. Edward Kane explains: 

Deception itself doesn't constitute illegal fraud when it's 
authorized by an accounting system such as the Generally Accepted 
Accounting Principles (GAAP) system which allows institutions to 
forego recording assets at their true worth, maintaining them instead 
at their inflated value. The regulatory accounting principles system in 
1982 added even new options to overstate capital.... Intense 
speculation, such as we observed in these firms, is not necessarily bad 
management at all. In most of these cases, it was clever management. 
There were clever gambles that exploited, not depositors or savers, but 
taxpayers. 1 

The press has greatly exaggerated the role of illegal fraud in 
these matters with much time spent excoriating the likes of Donald 
Dixon at Vernon S&L and Charles Keating at Lincoln Savings. 
True, these flops cost the taxpayer well over $3 billion dollars, but 
all the illegal fraud put together amounts to only about one-half of 
one per cent of the total losses so far. 2 Focusing on that minuscule 
component serves only to distract from the fact that the real 
problem is government regulation itself. 


Another part of the distraction has been to make it appear that 
the thrifts got into trouble because they were heavily invested in 
"junk bonds." 

Wait a minute! What are junk bonds, anyway? This may come 
as a surprise, but those held by the S&Ls were anything but junk. In 
fact, in terms of risk-return ratios, most of them were superior- 
grade investments to bonds from the Fortune-500 companies- 

1. "FIRREA: Financial Malpractice," by Edward J. Kane, Durell Journal ofMoney 
and Banking, May, 1990, p. 5. 

2. "Banking on Government," by Jane H. Ingraham, The New American, August 24, 
1992, p. 24. 



So-called junk bonds are merely those that are offered by smaller 
companies which are not large enough to be counted among the 
nation's giants. The large reinvestors, such as managers of mutual 
funds and retirement funds, prefer to stay with well-known names 
like General Motors and IBM. They need to invest truly huge 
blocks of money every day, and the smaller companies just don't 
have enough to offer to satisfy their needs. Consequently, many 
stocks and bonds from smaller companies are not traded in the 
New York Stock Exchange. They are traded in smaller exchanges or 
directly between brokers in what is called "over the counter." 
Because they do not have the advantage of being traded in the 
larger markets, they have to pay a higher interest rate to attract 
investors, and for that reason, they are commonly called high-yield 

Bonds offered by these companies are derided by some brokers 
as not being "investment grade," yet, many of them are excellent 
performers. In fact, they have become an important part of the 
American economy because they are the backbone of new industry. 
The most successful companies of the future will be found among 
their ranks. During the last decade, while the Fortune-500 compa- 
nies were shrinking and eliminating 3.6 million jobs, this segment 
of new industry has been growing and has created 18 million new 

Not all new companies are good investments — the same is true 
of older companies — but the small-company sector generally pro- 
vides more jobs, has greater profit margins, and pays more 
dividends than the so-called "investment-grade" companies. From 
1981 to 1991, the average return on ten-year Treasury bills was 10.4 
per cent; the Dow Jones Industrial Average was 12.9 per cent; and 
the average return on so-called junk bonds was 14.1 per cent. 
Because of this higher yield, they attracted more than $180 billion 
from savvy investors, some of whom were S&Ls. It was basically a 
new market which was orchestrated by an upstart, Michael Milken, 
at the California-based Drexel Burnham Lambert brokerage house. 


One of the major concerns at Jekyll Island in 1910 was the trend 
to obtain business-growth capital from sources other than bank 
loans. Here, seventy years later, the same trend was developing 


again in a slightly different form. Capital, especially for small 
companies, was now coming from bonds which Drexel had found a 
way to mass market. In fact, Drexel was even able to use those 
bonds to engineer corporate takeovers, an activity that previously 
had been reserved for the mega-investment houses. By 1986, Drexel 
had become the most profitable investment bank in the country. 

Here was $180 billion that no longer was being channeled 
through Wall Street. Here was $180 billion that was coming from 
people's savings instead of being created out of nothing by the 
banks. In other words, here was growth built upon real investment, 
not inflation. Certain people were not happy about it. 

Glenn Yago, Director of the Economic Research Bureau and 
Associate Professor of Management at the State University of New 
York at Stony Brook, explains the problem: 

It was not until high yield securities were applied to restructuring 
through deconglomeration and takeovers that hostilities against the 
junk bond market broke out.... The high yield market grew at the 
expense of bank debt, and high yield companies grew at the expense 
of the hegemony of many established firms. As Peter Passell noted in 
The NeZU York Times, the impact was first felt on Wall Street, "where 
sharp elbows and a working knowledge of computer spreadsheets 
suddenly counted more than a nose for dry sherry or membership in 
Skull and Bones." 1 

The first line of attack on this new market of high-yield bonds 
was to call them "junk." The word itself was powerful. The 
financial media picked it up and many investors were frightened 

The next step was for compliant politicians to pass a law 
requiring S&Ls to get rid of their "junk," supposedly to protect the 
public. That this was a hoax is evident by the fact that only 5% ever 
held any of these bonds, and their holdings represented only 1.2% 
of the total S&Ls assets. Furthermore, the bonds were performing 
satisfactorily and were a source of much needed revenue. Never- 
theless, The Financial Institutions Reform and Recovery Act, which 
was discussed previously, was passed in 1989. It forced S&Ls to 
liquidate at once their "junk" bond holdings. That caused their 

1. Glenn Yago, funk Bonds: How High Yield Securities Restructured Corporate America 
(New York: Oxford University Press, 1991), p. 5. 



rices to plummet, and the thrifts were even further weakened as 
they took a loss on the sale. Jane Ingraham comments: 

Overnight, profitable S&Ls were turned into government-owned 
basket cases in the hands of the Resolution Trust Corporation (RTC). 
To add to the disaster, the RTC itself, which became the country's 
brgest owner of junk bonds ... flooded the market again with $1.6 
billion of its holdings at the market's bottom in 1990.... 

So it was government itself that crashed the junk bond market, not 
Michael Milken, although the jailed Milken and other former officials 
of Drexel Burnham Lambert have just agreed to a $1.3 billion 
settlement of the hundreds of lawsuits brought against them by 
government regulators, aggrieved investors, and others demanding 
"justice." 1 

Incidentally, these bonds have since recovered and, had the 
S&Ls been allowed to keep them, they would be in better financial 
condition today. And so would be the RTC. 

With the California upstarts out of the way, it was a simple 
matter to buy up the detested bonds at bargain prices and to bring 
control of the new market back to Wall Street. The New York firm 
of Salomon Brothers, for example, one of Drexel's most severe 
critics during the 1980s, is now a leading trader in the market 
Drexel created. 


So the real problem within the savings-and-loan industry is 
government regulation which has insulated it from the free market 
and encouraged it to embark upon unsound business practices. As 
the Wall Street Journal stated on March 10,1992: 

If you're going to wreck a business the size of the U.S. Thrift 
industry, you need a lot more power than Michael Milken ever had. 
You need the power of national political authority, the kind of power 
possessed only by regulators and Congress. Whatever "hold" Milken 
or junk bonds may have had on the S&Ls, it was nothing compared 
with the interventions of Congress. 

At the time this book went to press, the number of S&Ls that 
operated during the 1980s had dropped to less than half. As 
failures, mergers, and conversion into banks continue, the number 
will decline further. Those that remain fall into two groups: those 

"Banking on Government," pp. 24, 25. 
Quoted in "Banking on Government," p. 26. 

11 J 

that have been taken over by the RTC and those that have not. Most 
of those that remain under private control — and that is a relative 
term in view of the regulations they endure — are slowly returning 
to a healthy state as a result of improved profitability, asset quality, 
and capitalization. The RTC-run organizations, on the other hand, 
continue to hemorrhage due to failure by Congress to provide 
funding to close them down and pay them off. Losses from this 
group are adding $6 billion per year to the ultimate cost of bailout. 
President Clinton was asking Congress for an additional $45 billion 
and hinting that this should be the last bailout — but no promises. 
The game continues. 


Congress seems disinterested and paralyzed with inaction. One 
would normally expect dozens of politicians to be calling for a 
large-scale investigation of the ongoing disaster, but there is hardly 
a peep. The reason becomes obvious when one realizes that 
savings-and-loan associations, banks, and other federally regulated 
institutions are heavy contributors to the election campaigns of 
those who write the regulatory laws. A thorough, public investiga- 
tion would undoubtedly turn up some cozy relationships that the 
legislators would just as soon keep confidential. 

The second reason is that any honest inquiry would soon reveal 
the shocking truth that Congress itself is the primary cause of the 
problem. By following the socialist path and presuming to protect 
or benefit their constituency, they have suspended and violated the 
natural laws that drive a free-market economy. In so doing, they 
created a Frankenstein monster they could not control. The more 
they tried to tame the thing, the more destructive it became. As 
economist Hans Sennholz has observed: 

The real cause of the disaster is the very financial structure that 
was fashioned by legislators and guided by regulators; they together 
created a cartel that, like all other monopolistic concoctions, is playing 
mischief with its victims. 1 


Sennholz has chosen exactly the right word: cartel. The savings- 
and-loan industry, is really a cartel within a cartel. It could not 

1. "The Great Banking Scandal," by Hans F. Sennholz, The Freeman, Nov., 1990, 
p. 405. 



function without Congress standing by to push unlimited amounts 
of money into it. And Congress could not do that without the 
banking cartel called the Federal Reserve System standing by as the 
"lender of last resort" to create money out of nothing for Congress 
to borrow. This comfortable arrangement between political scien- 
tists and monetary scientists permits Congress to vote for any 
scheme it wants, regardless of the cost. If politicians tried to raise 
that money through taxes, they would be thrown out of office. But 
being able to "borrow" it from the Federal Reserve System upon 
demand, allows them to collect it through the hidden mechanism of 
inflation, and not one voter in a hundred will complain. 

The thrifts have become the illegitimate half-breed children of 
the Creature. And that is why the savings-and-loan story is 
included in this study. 

If America is to survive as a free nation, her citizens must 
become far more politically educated than they are at present. As a 
people, we must learn not to reach for every political carrot 
dangled in front of us. As desirable as it may be for everyone to 
afford a home, we must understand that government programs 
pretending to make that possible actually wreak havoc with our 
system and bring about just the opposite of what they promise. 
After 60 years of subsidizing and regulating the housing industry, 
how many young people today can afford a home? Tinkering with 
the laws of supply and demand, plus the hidden tax called inflation 
to pay for the tinkering, has driven prices beyond the reach of 
many and has wiped out the down payments of others. Without 
such costs, common people would have much more money and 
purchasing power than they do today, and homes would be well 
within their reach. 


Our present-day problems within the savings-and-loan indus- 
try can be traced back to the Great Depression of the 1930s. 
Americans were becoming impressed by the theories of socialism 
and soon embraced the concept that it was proper for government 
to provide benefits for its citizens and to protect them against 
economic hardship. 

Under the Hoover and Roosevelt administrations, new govern- 
ment agencies were established which purported to protect depos- 
its in the S&Ls and to subsidize home mortgages for the middle 



class. These measures distorted the laws of supply and demand 
and, from that point forward, the housing industry was moved out 
of the free market and into the political arena. 

Once the pattern of government intervention had been estab- 
lished, there began a long, unbroken series of federal rules and 
regulations that were the source of windfall profits for managers, 
appraiser, brokers, developers, and builders. They also weakened 
the industry by encouraging unsound business practices and 
high-risk investments. 

When these ventures failed, and when the value of real estate 
began to drop, many S&Ls became insolvent. The federal insurance 
fund was soon depleted, and the government was confronted with 
its own promise to bail out these companies but not having any 
money to do so. 

The response of the regulators was to create accounting gim- 
micks whereby insolvent thrifts could be made to appear solvent 
and, thus, continue in business. This postponed the inevitable and 
made matters considerably worse. The failed S&Ls continued to 
lose billions of dollars each month and added greatly to the 
ultimate cost of bailout, all of which would eventually have to be 
paid by the common man out of taxes and inflation. The ultimate 
cost is estimated at over one trillion dollars. 

Congress appears to be unable to act and is strangely silent. 
This is understandable. Many representatives and senators are the 
beneficiaries of generous donations from the S&Ls. But perhaps the 
main reason is that Congress, itself, is the main culprit in this crime. 
In either case, the politicians would like to talk about something 

In the larger view, the S&L industry is a cartel within a cartel. 
The fiasco could never have happened without the cartel called the 
Federal Reserve System standing by to create the vast amounts of 
bailout money pledged by Congress. 

Chapter Five 


The 1944 meeting in Bretton Woods, New Hamp- 
shire, at which the world's most prominent social- 
ists established the International Monetary Fund 
and the World Bank as mechanisms for eliminat- 
ing gold from world finance; the hidden agenda 
behind the IMF/World Bank revealed as the 
building of world socialism; the role of the Federal 
Reserve in bringing that about. 

As we have seen, the game called Bailout has been played over 
and over again in the rescue of large corporations, domestic banks, 
and savings-and-loan institutions. The pretense has been that these 
measures were necessary to protect the public. The result, however, 
has been just the opposite. The public has been exploited as billions 
of dollars have been expropriated through taxes and inflation. The 
money has been used to make up losses that should have been paid 
by the failing banks and corporations as the penalty for misman- 
agement and fraud. 

While this was happening in our home-town stadium, the same 
game was being played in the international arena. There are two 
primary differences. One is that the amount of money at stake in 
the international game is much larger. Through a complex tangle of 
bank loans, subsidies, and grants, the Federal Reserve is becoming 
the "lender of last resort" for virtually the entire planet. The other 
difference is that, instead of claiming to be Protectors of the Public, 
the players have emblazoned across the backs of their uniforms: 
Saviors of the World. 


The game began at an international meeting of financiers, 
Politicians, and theoreticians held in July of 1944 at the Mount 
Washington Hotel in Bretton Woods, New Hampshire. Officially, it 



was called the United Nations Monetary and Financial Conference, 
but is generally referred to today as simply the Bretton Woods 
Conference. Two international agencies were created at that meet- 
ing: the International Monetary Fund and its sister organization, 
the International Bank for Reconstruction and Development — 
commonly called the World Bank. 

The announced purposes of these organizations were admira- 
ble. The World Bank was to make loans to war-torn and underde- 
veloped nations so they could build stronger economies. The 
International Monetary Fund (IMF) was to promote monetary 
cooperation between nations by maintaining fixed exchange rates 
between their currencies. But the method by which these goals 
were to be achieved was less admirable. It was to terminate the use 
of gold as the basis of international currency exchange and replace 
it with a politically manipulated paper standard. In other words, it 
was to allow governments to escape the discipline of gold so they 
could create money out of nothing without paying the penalty of 
having their currencies drop in value on world markets. 

Prior to this conference, currencies were exchanged in terms of 
their gold value, and the arrangement was called the "gold- 
exchange standard." This is not the same as a "gold-standard" in 
which a currency is backed by gold. It was merely that the 
exchange ratios of the various currencies— most of which were not 
backed by gold— were determined by how much gold they could 
buy in the open market. Their values, therefore, were set by supply 
and demand. Politicians and bankers hated the arrangement, 
because it was beyond their ability to manipulate. In the past, it had 
served as a remarkably efficient mechanism but it was a strict 
disciplinarian. As John Kenneth Galbraith observed: 

The Bretton Woods arrangements sought to recapture the 
advantages of the gold standard — currencies that were exchangeable 
at stable and predictable rates into gold and thus at stable and 
predictable rates into each other. And this it sought to accomplish 
while minimizing the pain imposed by the gold standard on countries 
that were buying too much, selling too little and thus losing gold." 

The method by which this was to be accomplished was exactly 
the method devised on Jekyll Island to allow American banks to 

1. John Kenneth Galbraith, Money: Whence It Came, Where It Went (Boston A 
Houghton Mifflin, 1975), pp. 258, 259. 



create money out of nothing without paying the penalty of having 
their currencies devalued by other banks. It was the establishment 
of a world central bank which would create a common fiat money 
for all nations and then require them to inflate together at the same 
rate. There was to be a kind of international insurance fund which 
would rush that fiat money to any nation that temporarily needed 
it to face down a "run" on its currency. It wasn't born with all these 
features fully developed, just as the Federal Reserve wasn't fully 
developed when it was born. That, nevertheless, was the plan, and 
it was launched with all the structures in place. 

The theoreticians who drafted this plan were the well-known 
Fabian Socialist from England, John Maynard Keynes, 1 and the 
Assistant Secretary of the U.S. Treasury, Harry Dexter White. 


The Fabians were an elite group of intellectuals who formed a 
semi-secret society for the purpose of bringing socialism to the 
world. Whereas Communists wanted to establish socialism quickly 
through violence and revolution, the Fabians preferred to do it 
slowly through propaganda and legislation. The word socialism 
was not to be used. Instead, they would speak of benefits for the 
people such as welfare, medical care, higher wages, and better 
working conditions. In this way, they planned to accomplish their 
objective without bloodshed and even without serious opposition. 
They scorned the Communists, not because they disliked their 
goals, but because they disagreed with their methods. To empha- 
size the importance of gradualism, they adopted the turtle as the 
symbol of their movement. The three most prominent leaders in the 
early days were Sidney and Beatrice Webb and George Bernard 
Shaw. A stained-glass window in the Beatrice Webb House in 
Surrey, England is especially enlightening. Across the top appears 
the last line from Omar Khayyam: 

Dear love, couldst thou and I with fate conspire 
To grasp this sorry scheme of things entire, 
Would we not shatter it to bits, and then 
Remould it nearer to the heart's desire! 

1. Keynes often is portrayed as having been merely a liberal. But, for his lifelong 
volvement with Fabians and their work, see Rose Martin, Fabian Freeway; High 
° ad 10 Socialism in the U.S.A. (Boston: Western Islands, 1966). 



Beneath the line Remould it nearer to the heart's desire, the mural 
depicts Shaw and Webb striking the earth with hammers. Across 
the bottom, the masses kneel in worship of a stack of books 
advocating the theories of socialism. Thumbing his nose at the 
docile masses is H.G. Wells who, after quitting the Fabians, 
denounced them as "the new machiavellians." The most revealing 
component, however, is the Fabian crest which appears Between 
Shaw and Webb. It is a wolf in sheep's clothing! 1 


Harry Dexter White was America's chief technical expert and 
the dominant force at the conference. He eventually became the 
first Executive Director for the United States at the IMF. An 
interesting footnote to this story is that White was simultaneously a 
member of the Council on Foreign Relations (CFR) and a memljer 
of a Communist espionage ring in Washington while he served as 
Assistant Secretary of the Treasury. And even more interesting is 
that the White House was informed of that fact when President 
Truman appointed him to his post. The FBI had transmitted to the 
White House detailed proof of White's activities on at least two 
separate occasions. 2 Serving as the technical secretary at the Bretton 
Woods conference was Virginius Frank Coe, a member of the same 
espionage ring to which White belonged. Coe later became the first 
Secretary of the IMF. 

Thus, completely hidden from public view, there was a com- 
plex drama taking place in which the intellectual guiding lights at 
the Bretton Woods conference were Fabian Socialists and Commu- 
nists. Although they were in disagreement over method, they were 
in perfect harmony on goal: international socialism. 

There were undoubtedly other reasons for Communists to be 
enthusiastic about the IMF and the World Bank, despite the fact 

1. See Zygmund Dobbs, The Great Deceit: Social Pseudo-Sciences (West Sayville, 
New York: Veritas Foundation, 1964), opposite p. 1. Also Rose L. Martin, Fabian 
Freeway: High Road to Socialism in the U.S.A. (Boston: Western Islands, 1966), pp. 30, 

2. See: David Rees, Harry Dexter White: A Study in Paradox (New York: Coward, 
McCann & Geoghegan, 1973); Whittaker Chambers, Witness (New York: Random 
House, 1952); Allen Weinstein, Perjury: The Hiss-Chambers Case (New York: Vintage 
Books, 1978); James Burnham, The Web of Subversion: Underground Networks in the 
U.S. Government (New York: The John Day Co., 1954); Elizabeth Bentley, Out of 
Bondage (New York: Devin- Adair, 1951) 



that the Soviet Union elected at the time not to become a member. 
The goal the organizations was to create a world currency, a 
world central bank, and a mechanism to control the economies of 
all nations. In order for these things to happen, the United States 
would of necessity have to surrender its dominant position. In fact, 
it would have to be reduced to just one part of the collective whole. 
That fit in quite nicely with the Soviet plan. Furthermore, the World 
Bank was seen as a vehicle for moving capital from the United 
States and other industrialized nations to the underdeveloped 
nations, the very ones over which Marxists have always had the 
greatest control. They looked forward to the day when we would 
pay their bills. It has all come to pass. 


The International Monetary Fund appears to be a part of the 
United Nations, much as the Federal Reserve System appears to be 
a part of the United States government, but it is entirely inde- 
pendent. It is funded on a quota basis by its member nations, 
almost two hundred in number. The greatest share of capital, 
however, comes from the more highly industrialized nations such 
as Great Britain, Japan, France, and Germany. The United States 
contributes the most, at about twenty per cent of the total. In 
reality, that twenty per cent represents about twice as much as the 
number indicates, because most of the other nations contribute 
worthless currencies which no one wants. The world prefers 

One of the routine operations at the IMF is to exchange 
worthless currencies for dollars so the weaker countries can pay 
their international bills. This is supposed to cover temporary 
cash-flow" problems. It is a kind of international FDIC which 
rushes money to a country that has gone bankrupt so it can avoid 
devaluing its currency. The transactions are seldom paid back. 

Although escape from the gold-exchange standard was the 
long-range goal of the IMF, the only way to convince nations to 
Participate at the outset was to use gold itself as a backing for its 
°wn money supply — at least as a temporary expedient. As Keynes 
explained it: 

I felt that the leading central banks would never voluntarily 
relinquish the then existing forms of the gold standard; and I did not 
desire a catastrophe sufficiently violent to shake them off 


involuntarily. The only practical hope lay, therefore, in a gradual 
evolution in the forms of a managed world currency, taking the 
existing gold standard as a starting point. 1 

It was illegal for American citizens to own gold at that time, but 
everyone else in the world could exchange their paper dollars for 
gold at a fixed price of $35 per ounce. That made it the de facto 
international currency because, unlike any other at the time, its 
value was guaranteed. So, at the outset, the IMF adopted the dollar 
as its own international monetary unit. 


But the Fabian turtle was crawling inexorably toward its 
destination. In 1970, the IMF created a new monetary unit called 
the SDR, or Special Drawing Right. The media optimistically 
described it as "paper gold," but it was pure bookkeeping wizardry 
with no relationship to gold or anything else of tangible value. 
SDRs are based on "credits" which are provided by the member 
nations. These credits are not money. They are merely promises 
that the governments will get the money by taxing their own 
citizens should the need arise. The IMF considers these to be 
"assets" which then become the "reserves" from which loans are 
made to other governments. As we shall see in chapter ten, this is 
almost identical to the bookkeeping sleight-of-hand that is used to 
create money out of nothing at the Federal Reserve System. 

Dennis Turner cuts through the garbage: 

SDRs are turned into loans to Third-World nations by the creation 
of checking accounts in the commercial or central banks of the member 
nations in the name of the debtor governments. These bank accounts 
are created out of thin air. The IMF creates dollars, francs, pounds, or 
other hard currencies and gives them to a Third-World dictator, with 
inflation resulting in the country where the currency originated.... 
Inflation is caused in the industrialized nations while wealth is 
transferred from the general public to the debtor country. And the 
debtor doesn't repay. 

When the IMF was created, it was the vision of Fabian Socialist 
John Maynard Keynes that there be a world central bank issuing a 

1. John Maynard Keynes, The Collected Writings of, Vol V (1930 rpt. New York: 
Macmillan, 1971), p. xx. 

2. Dennis Turner, When Your Bank Fails (Princeton, New Jersey: Amwell 
Publishing, 1983), p. 32. 



reserve currency called the "bancor " to free all governments from 

the discipline of gold. With the creation of SDRs, the IMF had 
finally begun to fulfill that dream. 


But there was still an obstacle. As long as the dollar was the 
primary currency used by the IMF and as long as it was redeemable 
in gold at $35 per ounce, the amount of international money that 
could be created would be limited. If the IMF were to function as a 
true world central bank with unlimited issue, the dollar had to be 
broken away from its gold backing as a first step toward replacing 
it completely with a bancor, an SDR or something else equally free 
from restraint. 

On August 15,1971, President Nixon signed an executive order 
declaring that the United States would no longer redeem its paper 
dollars for gold. So ended the first phase of the IMF's metamorpho- 
sis. It was not yet a true central bank, because it could not create its 
own world currency. It had to depend on the central banks of its 
member nations to provide cash and so-called credits; but since 
these banks, themselves, could create as much money as they 
wished, from now on, there would be no limit. 

The original purpose had been to maintain fixed rates of 
exchange between currencies; but the IMF has presided over more 
than two hundred currency devaluations. In private industry, a 
failure of that magnitude might be cause for going out of business, 
but not in the world of politics. The greater the failure, the greater 
the pressure to expand the program. So, when the dollar broke loose 
from gold and there was no longer a ready standard for measuring 
currency values, the IMF merely changed its goal and continued to 
expand its operation. The new goal was to "overcome trade 


The topic of trade deficits is a favorite among politicians, 
economists, and talk-show hosts. Everyone agrees they are bad, but 
there is much disagreement over what causes them. Let's have a try 
at it. 

A trade deficit is a condition that exists when a country imports 
a greater value of goods than it exports. In other words, it spends 
more than it earns in international trade. This is similar to the 
situation of an individual who spends more than he earns. In both 



cases, the process cannot be sustained unless: (1) earnings are 
increased; (2) money is taken out of savings; (3) assets are sold; (4) 
money is counterfeited; or (5) money is borrowed. Unless one of 
these occurs, the individual or the country has no choice but to 
decrease spending. 

Increasing one's earnings is the best solution. In fact, it is the 
only solution for the long haul. All else is temporary at best. An 
individual can increase his income by working harder or smarter or 
longer. A country does it the same way. But it cannot happen 
unless private industry is allowed to flourish in a system of 
free-enterprise. The problem with this option is that few politicians 
respect the dynamic power of the free-enterprise system. Their 
world is built upon political programs in which the laws of the free 
market are manipulated to achieve politically popular goals. They 
may desire the option of increasing the nation's income by increas- 
ing its productivity, but their political agenda prevents that from 
happening. 1 

The second option is to obtain extra money out of savings. But 
there are virtually no governments in the world today that have 
any savings. Their debts and liabilities exceed assets by a large 
margin. Likewise, most of their industries and their citizens are in a 
similar position. Their savings already have been consumed by 

The third option, the selling of assets, also is not available for 
most countries. By assets, we mean tangible items other than 
merchandise which is normally for sale. Although these, too, are 
assets in the broad meaning, in accounting methodology, they are 
classified as inventory. The only government asset that is readily 
marketable is gold, and few countries today have a stockpile from 
which to draw. Even in those cases, what little they have is already 

1. It is the author's opinion that it's time to get the politicians wearing Uncle-Sam 
suits off our backs. Which is easier said than done, because Americans still like their 
protectionist subsidies: tariffs to protect the business man, minimum wages and 
compulsory unionism to protect the worker, ethnic quotas in hiring to protect the 
underdog, cradle-to-the-grave insurance programs, unemployment benefits, dis- 
ability compensation, extreme environmental and safety measures — regardless of 
cost. Free enterprise can and will produce all of these benefits in order to compete 
for buyers and employees alike. But, as long as these measures are compulsory and 
chosen on the basis of political popularity without regard to economic conse- 
quences, American industry will never be able to recover. And then none of 'he 
illusory benefits will remain. 



owed to another government or a bank. As for private assets, 
nations can, for a while, sell these to foreign buyers and offset their 
negative trade balances. That is what has been happening in the 
United States for many years as office buildings, stocks, factories, 
and entire companies have been sold to foreign investors. But the 
fact remains that the nation is still spending more than it earns, and 
that process cannot continue indefinitely. Foreign ownership and 
control over industry and commerce also create sociological and 
political problems. Underdeveloped countries do not have to 
worry about any of that, however, because they have few private 
assets to sell. 


The counterfeit option is available only if a country happens to 
be in the unique position of having its currency accepted as the 
medium of international trade, as has been the case for the United 
States. In that event, it is possible to create money out of nothing, 
and other nations have no choice but to accept it. Thus, for years, 
the United States has been able to spend more money than it earned 
in trade by having the Federal Reserve create whatever it needed. 

When the dollar was separated entirely from gold in 1971, it 
ceased being the official IMF world currency and finally had to 
compete with other currencies — primarily the mark and the yen — 
on the basis of its relative merit. From that point forward, its value 
increasingly became discounted. Nevertheless, it was still the 
preferred medium of exchange. Also, the U.S. was one of the safest 
places in the world to invest one's money. But, to do so, one first 
had to convert his native currency into dollars. These facts gave the 
US dollar greater value on international markets than it otherwise 
would have merited. So, in spite of the fact that the Federal Reserve 
was creating huge amounts of money during this time, the demand 
for it by foreigners was seemingly limitless. The result is that 
America has continued to finance its trade deficit with fiat money — 
counterfeit, if you will— a feat which no other nation in the world 
could hope to accomplish. 

We have been told that our nation's trade deficit is a terrible 
and that it would be better to "weaken the dollar" to bring it 
an end. Weakening the dollar is a euphemism for increasing 
n lation. In truth, America is not hurt by a trade deficit at all. In 
' We are the benefactors while our trading partners are the 



victims. We get the cars and TV sets while they get the funny 
money. We get the hardware. They get the paperware. 

There is a dark side to the exchange, however. As long as the 
dollar remains in high esteem as a trade currency, America can 
continue to spend more than it earns. But when the day arrives — as 
it certainly must — when the dollar tumbles and foreigners no 
longer want it, the free ride will be over. When that happens, 
hundreds of billions of dollars that are now resting in foreign 
countries will quickly come back to our shores as people every- 
where in the world attempt to convert them into yet more real 
estate, factories, and tangible products, and to do so as quickly as 
possible before they become even more worthless. As this flood of 
dollars bids up prices, we will finally experience the inflation that 
should have been caused in years past but which was postponed 
because foreigners were kind enough to take the dollars out of our 
economy in exchange for their products. 

The chickens will come home to roost. But, when they do, it will 
not be because of the trade deficit. It will be because we were able 
to finance the trade deficit with fiat money created by the Federal 
Reserve. If it were not for that, the trade deficit could not have 

Back to the main topic, which is the five methods by which a 
trade deficit can be paid. Through the process of elimination, the 
fourth option of borrowing is where the action is today for most of 
the world, and that is where the IMF positioned itself in 1970. Its 
new mission was to provide loans so countries can continue to 
spend more than they earn, but to do so in the name of "overcom- 
ing trade deficits." 


These loans do not go into private enterprises where they have 
a chance of being turned for a profit. They go into state-owned and 
state-operated industries which are constipated by bureaucracy 
and poisoned by corruption. Doomed to economic failure from the 
start, they consume the loans with no possibility of repayment. 
Even the interest quickly becomes too much to handle. Which 
means the IMF must fall back to the "reserves," back to the 
"assets," back to the "credits," and eventually back to the taxpayers 
to bail them out. 



Whereas the International Monetary Fund is evolving into a 
world central bank which eventually will issue a world currency 
based on nothing, its sister organization, the World Bank, has 
become its lending agency. Acting as Savior of the World, it seeks to 
aid the underdeveloped nations, to feed the hungry, and to bring a 
better life to all mankind. In pursuit of these humanitarian goals, it 
provides loans to governments at favorable terms, usually at rates 
below market, for terms as long as fifty years, and often with no 
payments due until after ten years. 

Funding for these loans comes from member states in the form 
of a small amount of cash, plus promises to deliver about ten-times 
more if the Bank gets into trouble. The promises, described as 
callable capital," constitute a kind of FDIC insurance program but 
with no pretense at maintaining a reserve fund. (In that sense it is 
more honest than the real FDIC which does maintain the pretense 
but, in reality, is based on nothing more than a similar promise.) 

Based upon the small amount of seed money plus the far 
greater amount of "credits" and "promises" from governments of 
the industrialized countries, the World Bank is able to go into the 
commercial loan markets and borrow larger sums at extremely low 
interest rates. After all, the loans are backed by the most powerful 
governments in the world which have promised to force their 
taxpayers to make the payments if the Bank should get into trouble. 
It then takes these funds and relends them to the underdeveloped 
countries at slightly higher rates, making a profit on the arbitrage. 

The unseen aspect of this operation is that the money it 
processes is money which, otherwise, would have been available 
for investment in the private sector or as loans to consumers. It 
siphons off much-needed development capital for private industry, 
prevents new jobs from being created, causes interest rates to rise, 
and retards the economy at large. 


Although most of the policy statements of the World Bank deal 
with economic issues, a close monitoring of its activities reveal a 
Preoccupation with social and political issues. This should not be 
surprising considering that the Bank was perceived by its founders 
as an instrument for social and political change. The change which 

it was designed to bring about was the building of world socialism, 
and that is exactly what it is accomplishing today. 



This hidden agenda becomes crystal clear in the nature of what 
the Bank calls Sectoral Loans and Structural-Adjustment Loans. In 
the first category, only part of the money is to be used for the costs 
of specific projects while the rest goes to support policy changes in 
the economic sector. In the second group, all of the money is for 
policy changes and none of it is for projects. In recent years, almost 
half of the loans to underdeveloped countries have been in that 
category. What are the policy changes that are the object of these 
loans? They add up to one thing: the building of world socialism. 

As the Fabians had planned it, the word socialism is not to be 
used. Instead, the loans are issued for government hydro-electric 
projects, government oil refineries, government lumber mills, gov- 
ernment mining companies, and government steel plants. It is 
delivered from the hands of politicians and bureaucrats into the 
hands of other politicians and bureaucrats. When the money comes 
from government, goes to government, and is administered by 
government, the result will be the expansion of government. 

Here is an example. One of the policy changes often required by 
the World Bank as a condition of granting a loan is that the 
recipient country must hold down its wages. The assumption is 
that the government has the power — and rightfully should have the 
power — to set wages! In other words, one of the conditions of its 
loan is that the state must be omnipotent. 

Paul Roberts holds the William E. Simon Chair of Political 
Economy at the Center for Strategic and International Studies in 
Washington. Writing in Business Week, he says: 

The entire "development process" has been guided by the belief 
that reliance on private enterprise and equity investment is 
incompatible with economic and social progress. In place of such 
proven avenues of success, development planning substituted loans 
and foreign aid so that governments of the LDCs [Less Developed 
Countries] could control economic activity in keeping with plans 
drawn up by experts. 

Consequently, economic life in the LDCs was politicized from the 
start. By endowing governments with extensive control over their 
economies, the U.S. set up conditions exactly opposite to those 
required for economic growth. 1 

1. "How 'Experts' Caused the Third World Debt Crisis," by Paul Craig Roberts, 
Business Week, November 2,1987. 



Ken Ewert explains further that the conditions imposed by the 
Fund are seldom free-market oriented. He says: 

The Fund concentrates on "macro-policies," such as fiscal and 
monetary policies or exchange rates, and pays little attention to 
fundamental issues like private property rights and freedom of 
enterprise. Implicit ... is the belief that with proper "macro- 
management" any economic system is viable.... 

Even more important, it has allowed governments the world over 
to expropriate the wealth of their citizens more efficiently (through the 
hidden tax of inflation) while at the same time aggrandizing their own 
power. There is little doubt that the IMF is an influence for world-wide 
socialism. 1 

An important feature of the Structural-Adjustment Loans is that 
the money need not be applied to any specific development project. 
It can be spent for anything the recipient wishes. That includes 
interest payments on overdue bank loans. Thus, the World Bank 
becomes yet one more conduit from the pockets of taxpayers to the 
assets of commercial banks which have made risky loans to 
Third-World countries. 


Not every measure advocated by the IMF and World Bank is 
socialistic. Some of them even appear to be in support of the private 
sector, such as the reduction of government subsidies and welfare. 
They may include tax increases to reduce budget deficits. These 
policy changes are often described in the press as "austerity 
measures," and they are seen as hard-nosed business decisions to 
salvage the failing economies of underdeveloped countries. But, as 
the wolf (in sheep's clothing) said to Little Red-Riding-Hood, "All 
the better to fool you with, my dear." These austerity measures are 
meetly rhetoric. The borrowing nations usually ignore the condi- 
tions with impunity, and the World Bank keeps the money coming 
anyway. It's all part of the game. 

Nevertheless, the "structural-adjustment" conditions provide a 
scapegoat for local politicians who can now place the blame for 
their nation's misery on big, bad "capitalists" from America and the 
IMF. People who have been taught that it is government's role to 
provide for their welfare, their health care, their food and housing, 

1 "The International Monetary Fund," by KenS. Ewert, The Freeman, April, 1989, 


their jobs and retirement— such people will not be happy when 
they hear that these "rights" are being threatened. So they demon- 
strate in the streets in protest, they riot in the commercial sections 
of town so they can steal goods from stores, and they throng to the 
banner of leftist politicians who promise to restore or increase their 
benefits. As described by Insight magazine: 

National strikes, riots, political upheavals and social unrest in 
Argentina, Bolivia, Brazil, Ecuador, Egypt, Haiti, Liberia, Peru, Sudan 
and elsewhere have at various times been attributed to IMF austerity 

Some came to the fund with domestic trouble already brewing 
and seized on the fund as a convenient scapegoat. 1 

Quite true. An honest reading of the record shows that the IMF, 
far from being a force for austerity in these countries, has been an 
engine of socialist waste and a fountain of abundance for the 
corrupt leaders who rule. 


Nowhere is this pattern more blatant than in Africa. Julius 
Nyerere, the dictator of Tanzania, is notorious for his "villagiza- 
tion" program in which the army has driven the peasants from 
their land, burned their huts, and loaded them like cattle into trucks 
for relocation into government villages. The purpose is to eliminate 
opposition by bringing everyone into compounds where they can 
be watched and controlled. Meanwhile the economy staggers, 
farms have gone to weed, and hunger is commonplace. Yet, 
Tanzania has received more aid per capita from the World Bank 
than any other nation. 

In Uganda, government security forces have engaged in mass 
detentions, torture, and killing of prisoners. The same is true under 
the terrorist government in Zimbabwe. Yet, both regimes continue 
to be the recipients of millions of dollars in World Bank funding. 

Zimbabwe (formerly Rhodesia) is a classic case. After its 
independence, the leftist government nationalized (confiscated) 
many of the farms previously owned by white settlers. The most 
desirable of these lands became occupied by the government's 
senior ruling-party officials, and the rest were turned into state-run 
collectives. They were such miserable failures that the workers on 

1. "IMF Hands Out Prescription for Sour Economic Medicine," Insight, February 9, 
1987, p. 14. 



A ese farmlands were, themselves, soon begging for food. Not 
daunted by these failures, the socialist politicians announced in 
j991 that they were going to nationalize half of the remaining farms 
as well. And they barred the courts from inquiring into how much 
compensation would be paid to their owners. 

The IMF was represented in Zimbabwe at the time by Michel 
Camdessus, the Governor of the central Bank of France, and a 
former finance minister in Francois Mitterrand's Socialist govern- 
ment. After being informed of Zimbabwe's plan to confiscate 
additional land and to resettle people to work on those lands, 
Camdessus agreed to a loan valued at 42 billion rands with full 
knowledge that much of it would be used for the resettlement 

Perhaps the worst violations of human rights have occurred in 
Ethiopia under the Marxist regime of Mengistu Haile Mariam. The 
famine of 1984-85, which threatened the lives of millions of people, 
was the result of government nationalization and disruption of 
agriculture. Massive resettlement programs have torn hundreds of 
thousands of people from their privately owned land in the north 
and deported them to concentration-camp "villages" in the south, 
complete with guard towers. A report by a French voluntary 
medical-assistance group, Doctors without Borders, reveals that the 
forced resettlement program may have killed as many people as 
the famine itself. 1 Dr. Rony Brauman, director of the organization, 
describes their experience: 

Armed militiamen burst into our compounds, seized our 
equipment and menaced our volunteers. Some of our employees were 
beaten, and our trucks, medicines and food stores confiscated. We left 
Ethiopia branded as enemies of the revolution. The regime spoke the 
truth. The atrocities committed in the name of Mengistu's master plan 
did make us enemies of the revolution. 


In the 1980s, the world was saddened by photographs of 
starving children in Ethiopia, but what the West did not realize was 
that this was a planned famine. It was modelled after Stalin's 

J- "Ethiopia Bars Relief Team," by Blaine Harden, Washington Post, December 3, 

1985, p. A-21. 

~ "Famine Aid: Were we Duped?" by Dr. Rony Brauman, Raider's Divest, October 

1986, p. 7] 



starvation program in the Ukraine in the 1930s and Mao's starva- 
tion of the peasants in the '40s. Its purpose was to starve the 
population into total submission to the government, for it is the 
government which decides who will eat and who will not. Yet, 
right up to the time Mengistu was overthrown, the World Bank 
continued to send him hundreds of millions of dollars, with much 
of it going specifically to the Ministry of Agriculture, the very 
agency in charge of the resettlement program. 1 

In the late 1970s the same story unfolded in Communist 
Vietnam. There were resettlement programs, forced collectiviza- 
tion, concentration camps, atrocities, and tens of thousands of 
dissidents escaping to the sea only to drown in overcrowded, leaky 
boats. Throughout it all, the regime was generously funded by the 
World Bank. 

Laos has jailed thousands of political prisoners; Syria has 
massacred 20,000 members of its opposition; Indonesia has up- 
rooted several million people from their homelands in Java; the 
Sandinistas in Nicaragua murdered their opposition and terrorized 
the nation into submission; Poland, while a puppet state of the 
Soviet Union, brutally suppressed its trade-union movement; 
China massacred its dissident students and imprisoned its religious 
leaders; and the former Soviets slaughtered civilians in Afghani- 
stan while conducting a relentless espionage war against the entire 
free world. Yet, these regimes have been the recipient of literally 
billions of dollars from the World Bank. 

How can the Bank's managers continue in conscience to fund 
such genocidal regimes? Part of the answer is that they are not 
permitted to have a conscience. David Dunn, head of the Bank's 
Ethiopia Desk explained: "Political distinctions are not something 
our charter allows us to take into account." 2 The greater part of the 
answer, however, is that all socialist regimes have the potential for 
genocide, and the Bank is committed to socialism. The brutalities of 
these countries are all in a days work for serious socialists who 
view them as merely unfortunate necessities for the building of 
their Utopia. Lenin said you cannot make an omelet without 

1. James Bovard, The World Bank vs. The World's Poor, Cato Policy Analysis (Wash- 
ington, D.C.: Cato Institute, 1987), pp. 4-6. 

2. "Harnessing World Bank to the West," Insight, February 9, 1987, p. 8. 



cracking a few eggs. George Bernard Shaw, one of the early leaders 
of the Fabian Socialist movement, expressed it this way: 

Under Socialism, you would not be allowed to be poor. You would 
be forcibly fed, clothed, lodged, taught, and employed whether you 
liked it or not. If it were discovered that you had not character and 
industry enough to be worth all this trouble, you might possibly be 
executed in a kindly manner; but whilst you were permitted to live, 
you would have to live well. 


The top echelon at the World Bank are brothers under the skin 
to the socialist dictators with whom they do daily business. Under 
the right circumstances, they could easily switch roles. What we 
have seen is merely a preview of what can be expected for the 
entire world if the envisioned New World Order becomes opera- 

The IMF/ World Bank is the protege of the Federal Reserve. It 
would not exist without the flow of American dollars and the 
benevolence of American leadership. The Fed has become an 
accomplice in the support of totalitarian regimes throughout the 
world. As stated at the beginning of this study, that is one of the 
reasons it should be abolished: It is an instrument of totalitarianism. 


While the top leaders and theoreticians at the IMF and World 
Bank dream of world socialism, the middle managers and political 
rulers have more immediate goals in mind. The bureaucracy enjoys 
a plush life administering the process, and the politicians on the 
receiving end obtain wealth and power. Ideology is not their 
concern. Socialism, capitalism, fascism, it makes no difference to 
them as long as the money flows. 

Graham Hancock has been an astute observer of the interna- 
tional-aid "industry" and has attended their plush conferences. He 
knows many of the leading players personally. In his book, Lords of 
Poverty, he speaks of the IMF's Structural-Adjustment loans: 

Corrupt Ministers of Finance and dictatorial Presidents from Asia, 
Africa, and Latin America are tripping over their own expensive 
footwear in their unseemly haste to "get adjusted." For such people, 
money has probably never been easier to obtain than it is today; with 

Georg e Bernard Shaw. The Intelligent Woman's Guide to Socialism and Capitalism 
1928; rpt. New Brunswick, New Jersey: Transaction Books, 1984), p. 470. 


no complicated projects to administer and no messy accounts to keep, 
the venal, the cruel and the ugly are laughing literally all the way to 
the bank. For them structural adjustment is like a dream come true. JSJo 
sacrifices are demanded of them personally. All they have to 
do— amazing but true— is screw the poor, and they've already had 
plenty of practice at that. 1 

In India, the World Bank funded the construction of a dam that 
displaced two million people, flooded 360 square miles, and wiped 
out 81,000 acres of forest cover. In Brazil, it spent a billion dollars to 
"develop" a part of the Amazon basin and to fund a series of 
hydroelectric projects. It resulted in the deforestation of an area half 
the size of Great Britain and has caused great human suffering 
because of resettlement. In Kenya, the Bura irrigation scheme 
caused such desolation that a fifth of the native population 
abandoned the land. The cost was $50,000 per family served. In 
Indonesia, the transmigration program mentioned previously has 
devastated tropical forests — at the same time that the World Bank 
is funding reforestation projects. The cost of resettling one family is 
$7,000, which is about ten-times the Indonesian per-capita income. 

Livestock projects in Botswana led to the destruction of grazing 
land and the death of thousands of migratory animals. This 
resulted in the inability of the natives to obtain food by hunting, 
forcing them into dependence on the government for survival. 
While Nigeria and Argentina are drowning in debt, billions from 
the World Bank have gone into building lavish new capital cities to 
house government agencies and the ruling elite. In Zaire, Mexico, 
and the Philippines, political leaders became billionaires while 
receiving World Bank loans on behalf of their nations. In the 
Central African Republic, IMF and World Bank loans were used to 
stage a coronation for its emperor. 

The record of corruption and waste is endless. But the real 
eye-opener is in the failure of socialist ventures, those magnificent 
projects which were to bring prosperity to the underdeveloped 
countries. Here are just a few examples. 


Before receiving loans from the World Bank, Tanzania was not 
wealthy, but it fed its own people, and it had economic growth- 

1. Graham Hancock, Lords of Poverty: The Power, Prestige, and Corruption of the 
International Aid Business (New York: Atlantic Monthly Press, 1989), pp. 59,60. 



After receiving more than 3 billion dollars in loans, it nationalized 
the nation's farms and industries and converted every business into 
a government agency. It built a truck assembly plant, a tire factory, 
electronic factories, highways, ports, railways, and dams. Tanza- 
nia's industrial production and agricultural output fell by almost 
one-third. Food was the main export in 1966. Under socialism, food 
had to be imported— paid for by foreign aid and more loans from 
the World Bank. The country is hopelessly in debt with no way to 

Argentina once had one of the highest standards of living in 
Latin America. But then it became the recipient of massive loans 
from the World Bank as well as commercial banks in the United 
States. Since the money was given to politicians, it was used to 
build the only system politicians know how to build: socialism. By 
1982, the Gross National Product was in a nose dive, manufactur- 
ing had fallen to less than half of capacity, thousands of privately 
owned companies had been forced into bankruptcy, unemploy- 
ment was soaring, and so was welfare. By 1989, inflation was 
running at an average of 5,000% and, in the summer of that year, 
topped at 1,000,000%! Banks were offering interest rates of 600% 
per month in hopes of keeping deposits from being moved out of 
the country. People were rioting in the streets for food, and the 
government was blaming greedy shop owners for raising prices. 
The nation was hopelessly in debt with no way to repay. 

Brazil is run by the military, and the state controls the economy. 
Government-owned companies consume 65% of all industrial 
investment, which means that the private sector is limited to 35% 
and is shrinking. The government used loans from U.S. banks to 
create an oil company, Petroleo Brasileiro S.A., which became Latin 
America's largest corporation. Despite huge oil deposits and 
record-high oil prices, the company operated at a loss and was not 
even able to produce enough gasoline for its own citizens. By 1990, 
inflation was running at 5,000%. Since 1960, its prices had risen to 
164,000 times their original level. A new crime was invented called 
hedging against inflation," and people were arrested for charging 
the free-market price for their goods and for using dollars or gold 

as money. Led by Communist organizers, mobs roamed the streets 
shouting "We're hungry. Steal what you will!" The nation was 
hopelessly in debt with no way to repay. 


The experience in Mexico was a carbon copy of that in Brazil, 
except that the amount of money was larger. When the world's 
fourth largest oil reserves were discovered, Mexican politicians 
reached for the brass ring. With billions borrowed from U.S. banks, 
they launched Petroleos Mexicanos (PEMEX) and soon became the 
world's fifth largest oil producer. They also built chemical plants 
and railroads, and launched many other industrial projects. These 
were run as welfare agencies instead of businesses: too many 
people on the payroll, too many managers, excessive salaries, too 
many holidays, and unrealistic benefits. The ventures floundered 
and lost money. Private businesses failed by the thousands, and 
unemployment rose. The government increased the minimum 
wage causing more businesses to fail and more unemployment. 
That led to more welfare and unemployment benefits. To pay for 
that, the government borrowed even more and began creating its 
own fiat money. Inflation destroyed what was left of the economy. 

Price controls were next, along with rent and food subsidies, 
and doubling the minimum wage. By 1982, Mexicans were trading 
their pesos for dollars and sending their savings out of the country, 
as the peso became all but worthless in commerce. 1 In 1981, the 
average wage for Mexican workers was 31 % of the average wage 
for Americans. By 1989, it had fallen to 10%. Mexico, once one of 
the major food exporters in the world, was now required to import 
millions of dollars worth of food grains. This required still more 
money and more loans. All this occurred while oil prices were high 
and production was booming. A few years later, when oil prices 
fell, the failures and shortfalls became even more dramatic. 

In 1995, Mexico's bank loans were once again on the brink of 
default, and, once again, U.S. taxpayers were thrown into the 
breech by Congress to cover more than $30 billion at risk. Although 
this loan was eventually repaid, the money to do so was extracted 
from the Mexican people through another round of massive 
inflation, which plunged their standard of living even lower. The 
nation is now hopelessly mired in socialism. The Communist Party, 
promising "reform" and still more socialism, is attracting a large 
following and could become a potent political force. 

1. The same American banks that were making the loans were soliciting this flight 
capital and ended up getting deposits of the same money they had lent. It was nice 
business both ways. 



Thus, the saga continues. After pouring billions of dollars into 
underdeveloped countries around the globe, no development has 
taken place. In fact, we have seen just the opposite. Most countries 
are worse off than before the Saviors of the World got to them. 


The IMF and the World Bank, were created at a meeting of 
global financiers and politicians held at Bretton Woods, New 
Hampshire, in 1944. Their announced goals were to facilitate 
international trade and to stabilize the exchange rates of national 
currencies. The unannounced goals were quite different. They were 
the elimination of the gold-exchange standard as the basis of 
currency valuation and the establishment of world socialism. 

The method by which gold was to be eliminated in interna- 
tional trade was to replace it with a world currency which the IMF, 
acting as a world central bank, would create out of nothing. The 
method by which world socialism was to be established was to use 
the World Bank to transfer money— disguised as loans — to the 
governments of the underdeveloped countries and to do so in such 
a way as to insure the demise of free enterprise. The money was to 
be delivered from the hands of politicians and bureaucrats into the 
hands of other politicians and bureaucrats. When the money comes 
from government, goes to government, and is administered by 
government, the result will be the expansion of government. 

The theoreticians who dominated the conference at Bretton 
Woods were the well-known Fabian Socialist from England, John 
Maynard Keynes, and the Assistant Secretary of the U.S. Treasury, 
Harry Dexter White. White became the first Executive Director for 
the United States at the IMF. 

The Fabians were an elite group of intellectuals who agreed 
with Communists as to the goal of socialism but disagreed over 
tactics. Whereas Communists advocated revolution by force and 
violence, Fabians advocated gradualism and the transformation of 
society through legislation. 

It was learned in later years that Harry Dexter White was a 
Member of a Communist espionage ring. Thus, hidden from view, 
there was a complex drama taking place in which the two intellec- 
tual founders of the Bretton- Woods accords were a Fabian Socialist 
and a Communist, working together to bring about their mutual 
goal; world socialism. 



Capital for the IMF and the World Bank comes from the 
industrialized nations, with the United States putting up the most. 
Funds consist partly of hard currencies— such as the dollar, yen, 
mark and franc— but these are augmented by many times that 
amount in the form of "credits." These are merely promises by the 
member governments to get the money from their taxpayers if the 
Bank gets into trouble with its loans. 

While the IMF is gradually evolving into a central bank for the 
world, the World Bank is serving as its lending arm. As such, it has 
become the engine for transferring wealth from the industrialized 
nations to the underdeveloped countries. While this has lowered 
the economic level of the donating countries, it has not raised the 
level of the recipients. The money has simply disappeared down 
the drain of political corruption and waste. 

This is an accurate rendering of the stained-glass window in the Beatrice 
Webb House in Surrey, England, headquarters of the Fabian Society. It 
depicts Sidney Webb and George Bernard Shaw striking the earth with 
the wolf in sheep's clothing in the Fabian crest above the globe. 

Chapter Six 


The Game-Called-Bailout reexamined and shown 
to be far more than merely a means of getting 
taxpayers to foot the cost ofbad loans; the final 
play revealed as the merger of all nations into 
world government; the unfolding of that strategy 
as applied to Panama, Mexico, Brazil, Argentina, 
China, Eastern Europe, and Russia. 

Let us return now to the game called bailout. Everything in the 
previous chapter has been merely background information to 
understand the game as it is played in the international arena. 
Here, finally, are the rules: 

1. Commercial banks in the industrialized nations, backed by their 

respective central banks, create money out of nothing and lend 
it to the governments of underdeveloped nations. They know 
that these are risky loans, so they charge an interest rate that is 
high enough to compensate. It is more than what they expect to 
receive in the long run. 

2. When the underdeveloped nations cannot pay the interest on 

their loans, the IMF and World Bank enter the game as both 
players and referees. Using additional money created out of 
nothing by the central banks of their member nations, they 
advance "development" loans to the governments which now 
have enough to pay the interest on the original loans with 
enough left over for their own political purposes. 
3- The recipient country quickly exhausts the new supply of money, 
and the play returns to point number two. This time, however, 
the new loans are guaranteed by the World Bank and the central 
banks of the industrialized nations. Now that the risk of default 
is removed, the commercial banks agree to reduce the interest to 

A _ V 


the point anticipated at the beginning. The debtor governments 
resume payments. 
4. The final play is — well, in this version of the game there appears 
to be no final play, because the plan is to keep the game going 
forever. To make that possible, certain things must happen that 
are very final, indeed. They include the conversion of the IMF 
into a world central bank as Keynes had planned, which then 
issues an international fiat money. Once that "Bank of Issue" is 
in place, the IMF can collect unlimited resources from the 
citizens of the world through the hidden tax called inflation. The 
money stream then can be sustained indefinitely— with or 
without the approval of the separate nations— because they will 
no longer have money of their own. 

Since this game results in a hemorrhage of wealth from the 
industrialized nations, their economies are doomed to be brought 
down further and further, a process that has been going on since 
Bretton Woods. The result will be a severe lowering of their living 
standards and their demise as independent nations. The hidden 
reality behind so-called development loans is that America and 
other industrialized nations are being subverted by that process. 
'Hint is not an accident; it is the essence of the plan. A strong nation is 
not likely to surrender its sovereignty. Americans would not agree 
to turn over their monetary system, their military, or their courts to 
a world body made up of governments which have been despotic 
to their own people, especially since most of those regimes have 
already revealed anti- American hostility. But if Americans can be 
brought to the point where they are suffering from a collapse of 
their economy and from a breakdown in civil order, things will be 
different. When they stand in bread lines and face anarchy in their 
streets, they will be more willing to give up sovereignty in return 
for "assistance" from the World Bank and the UN "peacekeeping" 
forces. This will become even more acceptable if a structured 
demise of Communism can be arranged ahead of time to make it 
appear that the world's major political systems have converged 
into the common denominator of "social democracy." 


The underdeveloped nations, on the other hand, are not being 
raised up. What is happening to them is that their political leaders 
are becoming addicted to the IMF cash flow and will be unable to 


break the habit. These countries are being conquered by money 
instead of arms. Soon they will no longer be truly independent 
nations. They are becoming mere components in the system of 
world socialism planned by Harry Dexter White and John Maynard 
Keynes. Their leaders are being groomed to become potentates in a 
new, high-tech feudalism, paying homage to their Lords in New 
York. And they are eager to do it in return for privilege and power 
within the "New World Order." That is the final play. 

The essence of socialism is redistribution of the wealth. The 
goal is equality, and that means taking from the rich and giving to 
the poor. At least that's the theory. Unfortunately, the poor are 
never benefited by this maneuver. They either do not get the 
money in the first place— too much is siphoned off by the bureauc- 
racies which administer the programs — or, if they do get any of it, 
they don't know what to do with it. They merely spend it until it is 
gone, and then no one has any money— except, of course, those 
who administer the government programs. Nevertheless, politi- 
cians know that promises to redistribute the wealth are popular 
among two groups: the voters who naively believe it will help the 
poor, and the socialist managers who see it as job security. 
Supported by these two voting blocs, election to office is assured. 

One of the early American advocates of socialism on a global 
scale— including the draining of wealth away from the "rich" 
United States— was John F. Kennedy. He undoubtedly learned the 
concept while attending the Fabian London School of Economics in 
1935-36 just prior to his father's appointment as Ambassador to 
England. When JFK became President, his political views contin- 
ued to carry the imprint of that training. In September of 1963, he 
addressed the finance ministers and central-bank governors from 
102 nations at the annual meeting of the IMF/ World Bank. He 
explained the concept of world socialism in glowing terms: 

Twenty years ago, when the architects of these institutions met to 
design an international banking structure, the economic life of the 
world was polarized in overwhelming, and even alarming, measure 
on the United States.... Sixty per cent of the gold reserves of the world 
were here in the United States.... There was a need for redistribution 
of the financial resources of the world.... And there was an equal need 
to organize a flow of capital to the impoverished countries of the 

L Martin, p. 25. 


world. All this has come about. It did not come about by chance but by 
conscious and deliberate and responsible planning. 


The brain trust for implementing the Fabian plan in America is 
called the Council on Foreign Relations (CFR). We shall look at it 
closely in future chapters, but it is important to know at this point 
that almost all of America's leadership has come from this small 
group. That includes our presidents and their advisers, cabinet 
members, ambassadors, board members of the Federal Reserve 
System, directors of the largest banks and investment houses, 
presidents of universities, and heads of metropolitan newspapers, 
news services, and TV networks. 2 It is not an exaggeration to 
describe this group as the hidden government of the United States. 

CFR members have never been shy about calling for the 
weakening of America as a necessary step toward the greater good 
of building world government. One of the CFR founders was John 
Foster Dulles, who later was appointed Secretary-of-State by CFR 
member Dwight Eisenhower. In 1939, Dulles said: 

Some dilution or leveling off of the sovereignty system as it 
prevails in the world today must take place ... to the immediate 
disadvantage of those nations which now possess the preponderance 
of power.... The establishment of a common money ... would deprive 
our government of exclusive control over a national money.... The 
United States must be prepared to make sacrifices afterward in setting 
up a world politico-economic order which would level off inequalities 
of economic opportunity with respect to nations. 3 

CFR member Zbigniew Brzezinski was the National Security 
Adviser to CFR member Jimmy Carter. In 1970, Brzezinski wrote: 

... some international cooperation has already been achieved, but 
further progress will require greater American sacrifices. More 
intensive efforts to shape a new world monetary structure will have to 
be undertaken, with some consequent risk to the present relatively 
favorable American position. 4 

1. "Text of Kennedy Speech to World Monetary Parley," New York Times, 
October 1,1963, p. 16. 

2. For an in-depth analysis of the CFR, including a comprehensive list of members, 
see James Perloff, Shadows of Power (Appleton, Wisconsin: Western Islands, 1988). 

3. "Dulles Outlines World Peace Plan," New York Times, October 28,1939. 

4. Zbigniew Brzezinski, Between Two Ages: America's Role in the Technetronic Era 
(Westport, Connecticut: Greenwood Press, 1970), p. 300. 



At the Spring, 1983, Economic Summit in Williamsburg, Vir- 
ginia, President Ronald Reagan declared: 

National economies need monetary coordination mechanisms, 
and that is why an integrated world economy needs a common 
monetary standard.... But, no national currency will do — only a world 
currency will work. 

The CFR strategy for convergence of the world's monetary 
systems was spelled out by Harvard Professor Richard N. Cooper, 
a CFR member who had been the Under Secretary of State for 
Economic Affairs in the Carter Administration: 

I suggest a radical alternative scheme for the next century: the 
creation of a common currency for all of the industrial democracies, with a 
common monetary -policy and a joint Bank of Issue to determine that monetary 
policy.... How can independent states accomplish that? They need to 
turn over the determination of monetary policy to a supranational 
body. [Emphasis in original]... 

It is highly doubtful whether the American public, to take just one 
example, could ever accept that countries with oppressive autocratic 
regimes should vote on the monetary policy that would affect 
monetary conditions in the United States.... For such a bold step to 
work at all, it presupposes a certain convergence of political values.... 

Phrases such as, monetary coordination mechanisms, modern world 
economic order, convergence of political values, or new world order are 
not very specific. To the average person, they sound pleasant and 
harmless. Yet, to the insiders of the club, they are code phrases 
which have a specific meaning: the termination of national sover- 
eignty and the creation of world government. CFR member, 
Richard Gardner — another adviser to President Carter — explains 
the meaning of these phrases and also calls for the Fabian strategy 
of deception and gradualism: 

In short, the "house of world order" will have to be built from the 
bottom up.... An end run around national sovereignty, eroding it 
piece by piece, will accomplish much more than the old-fashioned 
frontal assault. 

As for the programmed decline of the American economy, CFR 
member Samuel Huntington argues that, if higher education is 

1 • "A Monetary System for the Future, " by Richard N. Cooper, Foreign Affairs, Fall, 
pp. 166,177,184. 

2. "The Hard Road to World Order," by Richard Gardner, Foreign Affairs, April, 


considered to be desirable for the general population, "a program is 
then necessary to lower the job expectations of those who receive a 
college education." 1 CFR member Paul Volcker, former Chairman 
of the Federal Reserve, says: "The standard of living of the average 
American has to decline.... I don't think you can escape that." 2 

By 1993, Volcker had become the U.S. Chairman of the Trilat- 
eral Commission. The TLC was created by David Rockefeller to 
coordinate the building of The New World Order in accordance 
with the Gardner strategy: "An end run around national sover- 
eignty, eroding it piece by piece." The objective is to draw the 
United States, Mexico, Canada, Japan, and Western Europe into 
political and economic union. Under slogans such as free trade and 
environmental protection, each nation is to surrender its sover- 
eignty "piece by piece" until a full-blown regional government 
emerges from the process. The new government will control each 
nation's working conditions, wages, and taxes. Once that has 
happened, it will be a relatively simple step to merge the regionals 
into global government. That is the reality behind the so-called 
trade treaties within the European Union (EU), the North American 
Free Trade Agreement (NAFTA), the Asia-Pacific Economic Coop- 
eration agreement (APEC), and the General Agreement on Tariffs 
and Trade (GATT). They have little to do with trade. In the 
Trilateral Commission's annual report for 1993, Volcker explains: 

Interdependence is driving our countries toward convergence in 
areas once considered fully within the domestic purview. Some of 
these areas involve government regulatory policy, such as 
environmental standards, the fair treatment of workers, and taxation." 

In 1992, the Trilateral Commission released a report co- 
authored by Toyoo Gyohten, Chairman of the Board of the Bank of 
Tokyo and formerly Japan's Minister of Finance for International 
Affairs. Gyohten had been a Fulbright Scholar who was trained at 
Princeton and taught at Harvard Business School. He also had been 
in charge of the Japan Desk of the International Monetary Fund. In 
short, he represents the Japanese monetary interests within The 

1. Michael Crozier, Samuel P. Huntington, and Joji Watanuki, The Crisis ofDemoc- 
racy (New York: New York University Press, 1975), pp. 183-84. 

2. "Volcker Asserts U.S. Must Trim Living Standard," New York Times, October 18, 
1979, p. 1. 

3. Washington 1993: The Annual Meeting of the Trilateral Commission, Trialogue 46 
(New York: Trilateral Commission, 1993), p. 77. 



jsjew World Order. In this report, Gyohten explains that the real 
importance of "trade" agreements is not trade but the building of 
global government: 

Regional trade arrangements should not be regarded as ends in 
themselves, but as supplements to global liberalization.... Regional 
arrangements provide models or building blocks for increased or 
strengthened globalism.... Western Europe [the EU] represents 
regionalism in its truest form.... The steps toward deepening 
[increasing the number of agreements] are dramatic and designed to 
be irreversible.... A common currency.... central bank.... court and 
parliament — will have expanded powers.... After the Maastricht 
summit [the Dutch town where the meeting was held], an Economist 
editorial pronounced the verdict: "Call it what you will: by any other 
name it is federal government."... In sum, the regional integration 
process in Europe can be seen as akin to an exercise in 

Applying this same perspective to the NAFTA treaty, former 
Secretary-of-State, Henry Kissinger (CFR), said it "is not a conven- 
tional trade agreement but the architecture of a new international 
system.... the vital first step for a new kind of community of 
nations." The newspaper article that contained this statement was 
appropriately entitled: "With NAFTA, U.S. Finally Creates a New 
World Order." David Rockefeller (CFR) was even more emphatic. 
He said that it would be "criminal" not to pass the treaty because: 
"Everything is in place — after 500 years — to build a true 'new 
world' in the Western Hemisphere." 3 

By early 1994, the drift toward the New World Order had 
become a rush. On April 15, the government of Morocco placed a 
full-page ad in the New York Times celebrating the creation of the 
World Trade Organization which was formed by the signing of the 
General Agreement on Tariffs and Trade (GATT) which took place 

in the Moroccan city of Marrakech. While Americans were still 
being told that GATT was merely a "trade" agreement, the 
internationalists were celebrating a much larger concept. The ad 
spelled it out in unmistakable terms: 

• Toyoo Gyohten and Charles E. Morrison, Regionalism in A Converging World 
IMw York: Trilateral Commission, 1992), pp. 4, 7-9,11. 

/ " w i t h n a f t a , U.S. Finally Creates a New World Order, " by Henry Kissinger, 
Angeles Times, July 18,1993, pp. M-2, 6. 

• A Hemisphere in the Balance," by David Rockefeller, Wall Street Journal, 
October 1,1993, p. A-10. 


1944, Bretton Woods: The IMF and the World Bank 
1945, San Francisco: The United Nations 
1994, Marrakech: The World Trade Organization 
History knows where it is going.... The World Trade Organization, 
the third pillar of the New World Order, along with the United 
Nations and the International Monetary Fund. 


So much for the final play. Let us return, now, to the game called 
bailout as it is actually played today on the international scene. Let 
us begin with a glimpse into the inner workings of the Presidential 
Cabinet. James Watt was the Secretary of the Interior in the Reagan 
Administration. In his memoirs, he described an incident at a 
Cabinet meeting in the spring of 1982. The first items on the agenda 
were reports by Treasury Secretary Donald Regan and Budget 
Director David Stockman concerning problems the less-developed 
countries were having with their bank loans. Watt said: 

Secretary Regan was explaining the inability of those destitute 
countries to pay even the interest on the loans that individual banks 
such as Bank of America, Chase Manhattan and Citibank had made. 
The President was being told what actions the United States "must" 
take to salvage the situation. 

After the Regan and Stockman briefings, there were several 
minutes of discussion before I asked, "Does anyone believe that these 
less developed countries will ever be able to pay back the principal on 
these loans?" When no one spoke up, I asked, "If the loans are never 
going to be repaid, why should we again bail out the countries and 
arrange payment for their interest?" 

The answer came from several voices at once, "If we don't arrange 
for their interest payments, the loans will go into default, and it could 
put our American banks in jeopardy." Would the customers lose their 
money? No, came the answer, but the stockholders might lose 

In amazement, I leaned back in my large, leather chair, only two 
seats from the President of the United States. I realized that nothing in 
the world could keep these high government officials from scrambling 
to protect and bail out a few very large and sorely troubled American 
banks. 2 

1. New York Times, April 15,1994, p. A9. 

2. James G. Watt, The Courage of A Conservative (New York: Simon and Schuster, 
1985), pp. 124-25. 




The first major score in the game had been made under the 
Carter Administration when Panama fell in arrears on the payment 
of its loans. A consortium of banks including Chase Manhattan, 
First National of Chicago, and Citibank brought pressure to bear on 
Washington to give the Canal to the Panamanian government so it 
could use the revenue to pay interest on its loans. Although there 
was massive opposition to this move among the American people, 
the Senate yielded to insider pressure and passed the give-away 
treaty. The Panamanian government inherited $120 million in 
annual revenue, and the interest payments to the banks were 
restored. As Congressman Philip Crane observed: 

At the time of the Torrijos-backed coup in 1968, Panama's total 
official overseas debt stood at a manageable and, by world standards, 
modest $167 million. Under Torrijos, indebtedness has skyrocketed 
nearly one thousand percent to a massive $1.5 billion. Debt-service ratio 
now consumes an estimated 39 percent of the entire Panamanian 
budget.... What it appears we really have here is not just aid to a 
tinhorn dictator in the form of new subsidies and canal revenues the 
treaties would give to the Torrijos regime, but a bailout of a number of 
banks which should have known better than to invest in Panama and, 
in any event, should not escape responsibility for having done so. 1 

The Panama bailout was a unique play. In no other country did 
we have an income-producing property to give away, so from that 
point forward the bailout would have to be done with mere money. 
To pave the way for that, Congress passed the Monetary Control 
Act of 1980 which authorized the Federal Reserve to "monetize 
foreign debt." That is banker language meaning that the Fed was 
now authorized to create money out of nothing for the purpose of 
lending to foreign governments. It classifies those loans as "assets" 
and then uses them as collateral for the creation of even more 
money here in the United States. That was truly a revolutionary 
expansion of the Fed's power to inflate. Until then, it was permitted 
to make money only for the American government. Now, it was able 
to do it for any government. Since then it has been functioning as a 
central bank for the entire world. 

j- Philip M. Crane, Surrender in Panama (Ottawa, Illinois: Caroline House Books, 
W78 ). pp. 64,68. 



By 1982, almost every Third-World government was running 
behind in payments. Mexico led the way by announcing it could 
not send any more money that year on its $85 billion debt. Federal 
Reserve Governor Henry Wallich rushed to Switzerland to negoti- 
ate an IMF loan of $4.5 billion through the Bank of International 
Settlements. The central banks of Europe and Japan provided $1.85 
billion (about 40%); the rest came from the Federal Reserve. 
Commercial banks postponed payments on the principal for two 
years; but, with the infusion of new loans, payment on the interest 
was resumed. That did not solve the problem. Within a few years, 
Mexico was in arrears again and, in 1985, the banks agreed to 
postpone $29 billion in payments and rolled over another $20 
billion, which means they issued new loans to pay off the old. 

In that same year, Secretary of the Treasury James Baker 
announced the government's plan to solve the world's debt crisis. It 
was a formal statement encouraging banks to continue lending to 
Third-World governments provided they promised to enact eco- 
nomic reforms favoring a free market. It was more of a philosophy 
than a plan, because there was no hope that it would be imple- 
mented by any of the socialist governments receiving the loans. 
Behind the announcement was the implication that the federal 
government, acting through the Federal Reserve System, could be 
counted on to assist if the loans went sour. Baker called for 
funneling $29 billion over three years primarily to Latin American 
countries, of which Mexico was a prime recipient. 


Shortly after the Mexican government had loaned $55 million to 
Fidel Castro, it announced to the banks: 'We will pay only what we 
have, and no more." Whereupon Paul Volcker, head of the Federal 
Reserve, rushed to meet with Mexico's finance minister, Jesus Silva 
Herzog, and offered to put the American taxpayer into the breach. 
A $600 million short-term loan was extended to get Mexico past its 
election date of July 4. It was called a "currency swap" because 
Mexico exchanged an equal number of pesos which it promised to 
redeem in U.S. dollars. Pesos, of course, were worthless in interna- 
tional markets— which is the reason Mexico wanted the dollars. 

The importance of this loan was not its size nor even the 
question of repayment. It was the manner in which it was made. 



first, it was made by the Federal Reserve directly, acting as a central 
bank for Mexico, not the U.S.; and secondly, it was done almost in 
total secrecy. William Greider gives the details: 

The currency swaps had another advantage: they could be done 
secretly. Volcker discreetly informed both the Administration and the 
key congressional chairmen, and none objected. But the public 
reporting of currency swaps was required only every quarter, so the 
emergency loan from the Fed would not be disclosed for three or four 
months.... By that time, Volcker hoped, Mexico would be arranging 
more substantial new financing from the IMF.... The foreign assistance 
was done as discreetly as possible to avoid setting off a panic, but also 
to avoid domestic political controversy.... Bailing out Mexico, it 
seemed, was too grave to be controversial. 1 


The currency swap did not solve the problem. So, in March of 
1988, the players and referees agreed to introduce a new maneuver 
in the game: an accounting trick called a "debt swap." A debt swap 
is similar to a currency swap in that the United States exchanges 
something of real value in return for something that is worthless. 
But, instead of currencies, they exchange government bonds. The 
transaction is complicated by the time-value of those bonds. 
Currencies are valued by their immediate worth, what they will buy 
today, but bonds are valued by their future worth, what they will 
buy in the future. After that differential factor is calculated, the 
process is essentially the same. Here is how it worked. 

Mexico, using U.S. dollars, purchased $492 million worth of 
American Treasury Bonds that pay no interest but which will pay 
$3.67 billion when they mature in twenty years. (Technically, these 
are called zero-coupon bonds.) Then Mexico issued its own bonds 
with the U.S. securities tied to them as collateral. This meant that 
the future value of Mexico's bonds, previously considered worth- 
less, were now guaranteed by the United States government. The 
banks eagerly swapped their old loans for these new Mexican 
bonds at a ratio of about 1.4 to 1. In other words, they accepted $100 
million in bonds in return for canceling $140 million in old debt. 
That reduced their interest income, but they were happy to do it, 
because they had swapped worthless loans for fully-guaranteed 

1 Greider, pp. 485-6. 


This maneuver was hailed in the press as true monetary magic. 
It would save the Mexican government more than $200 million in 
annual interest charges; it would restore cash flow to the banks; 
and — miracle of miracles — it would cost nothing to American 
taxpayers. 1 The reasoning was that the Treasury bonds were sold at 
normal market rates. The Mexican government paid as much for 
them as anyone else. That part was true, but what the commenta- 
tors failed to notice was where Mexico got the American dollars 
with which to buy the bonds. They came through the IMF in the 
form of "foreign-currency exchange reserves." In other words, they 
were subsidies from the industrialized nations, primarily the 
United States. So, the U.S. Treasury put up the lion's share of the 
money to buy its own bonds. It went a half -billion dollars deeper in 
debt and agreed to pay $3.7 billion more in future payments so the 
Mexican government could continue paying interest to the banks. 
That is called bailout, and it does fall on the American taxpayer. 


The following year, Secretary of State, James Baker (CFR), and 
Treasury Secretary, Nicholas Brady (CFR), flew to Mexico to work 
out a new debt agreement that would begin to phase in the IMF as 
final guarantor. The IMF gave Mexico a new loan of $3.5 billion 
(later increased to $7.5 billion), the World Bank gave another $1.5 
billion, and the banks reduced their previous loan values by about 
a third. The private banks were quite willing to extend new loans 
and reschedule the old. Why not? Interest payments would now be 
guaranteed by the taxpayers of the United States and Japan. 

That did not permanently solve the problem, either, because the 
Mexican economy was suffering from massive inflation caused by 
internal debt, which was in addition to the external debt owed to the 
banks. The phrases "internal debt" and "domestic borrowing" are 
code for the fact that government has inflated its money supply by 
selling bonds. The interest it must pay to entice people to purchase 
those bonds can be staggering and, in fact, interest on Mexico's 
domestic borrowing was draining three times as much from the 
economy as the foreign debt service had been siphoning off. 2 

1. "U.S. Bond Issue Will Aid Mexico in Paying Debts," by Tom Redburn, Los 
Angeles Times, December 30,1987. 

2. "With Foreign IOUs Massaged, Interest Turns to Internal Debt," Insight, Octo- 
ber 2,1989, p. 34. 



Notwithstanding this reality, Citicorp chairman, John S. Reed 
(CFR)/ whose bank is one of Mexico's largest lenders, said they 
were prepared to lend even more now. Why? Did it have anything 
to do with the fact that the Federal Reserve and the IMF would 
guarantee payments? Not so. "Because we believe the Mexican 
economy is doing well," he said. 1 

At the end of 1994, the game was still going, and the play was 
the same. On December 21, the Mexican government announced 
that it could no longer pay the fixed exchange rate between the 
peso and the dollar and that the peso would now have to float in 
the free market to find its true value. The next day it plummeted 39 
per cent, and the Mexican stock market tumbled. Once again, 
Mexico could not pay the interest on its loans. On January 11, 
President Clinton (CFR) urged Congress to approve U.S. guaran- 
tees for new loans up to $40 billion. Secretary of the Treasury 
Robert Rubin (CFR) explained: "It is the judgment of all, including 
Chairman Alan Greenspan [CFR], that the probability of the debts 
being paid [by Mexico] is exceedingly high." But, while Congress 
debated the issue, the loan clock was ticking. Payment of $17 billion 
in Mexican bonds was due within 60 days, and $4 billion of that 
was due on the first of February! Who was going to pay the banks? 

This matter could not wait. On January 31, acting inde- 
pendently of Congress, President Clinton announced a bailout 
package of over $50 billion in loan guarantees to Mexico; $20 billion 
from the U.S. Exchange Stabilization Fund, $17.8 billion from the 
IMF, $10 billion from the Bank of International Settlements, and 
$3 billion from commercial banks. 


Brazil became a major player in 1982 when it announced that it 
too was unable to make payments on its debt. In response, the U.S. 
Treasury made a direct loan of $1.23 billion to keep those checks 
going to the banks while negotiations were under way for a more 
Permanent solution through the IMF. Twenty days later, it gave 
another $1.5 billion; the Bank of International Settlements advanced 
$1.2 billion. The following month, the IMF provided $5.5 billion; 
Western banks extended $10 billion in trade credits; old loans were 
rescheduled; and $4.4 billion in new loans were made by a Morgan 

L ibid., p. 35. 


Bank syndication. The "temporary" loans from the U.S. Treasury 
were extended with no repayment date established. Ron Chernow 

The plan set a fateful precedent of "curing" the debt crisis by 
heaping on more debt. In this charade, bankers would lend more to 
Brazil with one hand, then take it back with the other. This preserved 
the fictitious book value of loans on bank balance sheets. Approaching 
the rescue as a grand new syndication, the bankers piled on high 
interest rates and rescheduling fees. 1 

By 1983, Third-World governments owed $300 billion to banks 
and $400 billion to the industrialized governments. Twenty-five 
nations were already behind in their payments. Brazil was in 
default a second time and asked for rescheduling, as did Rumania, 
Cuba, and Zambia. The IMF stepped in and made additional 
billions of dollars available to the delinquent countries. The Depart- 
ment of Agriculture, through its Commodity Credit Corporation, 
paid $431 million to American banks to cover payments on loans 
from Brazil, Morocco, Peru, and Rumania. At the conclusion of 
these agreements, the April 20, 1983, Wall Street Journal editorial- 
ized that "the international debt crisis ... is, for all practical 
purposes, over." 

Not quite. By 1987, Brazil was again in default on its monstrous 
$121 billion debt, this time for one and a-half years. In spite of the 
torrent of money that had passed through its hands, it was now so 
broke, it couldn't even buy gasoline for its police cars. In 1989, as a 
new round of bailout was being organized. President Bush(CFR) 
announced that the only real solution to the Third-World debt 
problem was debt forgiveness. 

Perhaps, through repetition, we are running this history into 
the ground, but here are just a few more examples before moving 


By 1982, Argentina was unable to make a $2.3 billion payment 
that was due in July and August. The banks extended their loans 
while the IMF prepared a new infusion in the amount of $2.15 
billion. This restored the interest payments and gave the 
Argentinian politicians a little extra spending money. Seven 

1. Chernow, p. 644. 


months later, Argentina announced it could not make any more 
payments until the fall of 1983. The banks immediately began 
negotiations for rollovers, guarantees, and new IMF loans. 

Argentina then signed an agreement with 350 creditor banks to 
stretch out payments on nearly a fourth of its $13.4 billion debt, and 
the banks agreed to lend an extra $4.2 billion to cover interest 
payments and political incentives. The IMF gave $1.7 billion. The 
United States government gave an additional $500 million directly. 
Argentina then paid $850 million in overdue interest charges to the 

By 1988, Argentina had again stopped payment on its loans and 
was falling hopelessly behind as bankers and politicians went into 
a huddle to call the next bailout play. Somehow, the payments had 
to be passed on one more time to the taxpayers — which they were 
in the form of new loans, rollovers, and guarantees. As summa- 
rized by Larry A. Sjaastad at the University of Chicago: 

There isn't a U.S. bank that would not sell its entire Latin 
American portfolio for 40 cents on the dollar were it not for the 
possibility that skillful political lobbying might turn up a sucker 
willing to pay 50 or 60 or even 90 cents on the dollar. And that sucker 
is the U.S. Taxpayer. 

As mentioned previously, this history can become repetitious 

and boring. It would be counterproductive to cover the same 

sordid story as it has unfolded in each country. Suffice it to say that 

the identical game has been played with teams from Bolivia, Peru, 

Venezuela, Costa Rica, Morocco, the Philippines, the Dominican 

Republic, and almost every other less-developed country in the 


This sets the stage for understanding the next phase of the game 
which is unfolding as these words are being written. It is the 
inclusion of China and the former Soviet bloc into the Grand 
Design for global government. As with all the other countries in the 
world, the primary mechanism being used to accomplish this 
goal— at least in the field of economics — is the IMF/World Bank. 2 
he process is: (1) the transfer of money from the industrialized 

1 "Another Plan to Mop Up the Mess," Insight, April 10,1989, p. 31. 

2 Other mechanisms which involve culture, education, political sovereignty, and 
itary power are embodied in agencies of the United Nations. 



nations— which drags them down economically to a suitable 
common denominator — and (2) the acquisition of effective control 
over the political leaders of the recipient countries as they become 
dependent upon the money stream. The thing that is new and 
which sets this stage apart from previous developments is that the 
apparent crumbling of Communism has created an acceptable 
rationale for the industrialized nations to now allow their lifeblood 
to flow into the veins of their former enemies. It also creates the 
appearance of global, political "convergence," a condition which 
CFR theoretician, Richard Cooper, said was necessary before 
Americans would accept having their own destinies determined by 
governments other than their own. 


Red China joined the IMF/ World Bank in 1980 and immedi- 
ately began to receive billions of dollars in loans, although it was 
well known that she was devoting a huge portion of her resources 
to military development. By 1987, China was the IMF's second 
largest borrower, next to India, and the transfusions have grown at 
a steady pace ever since. 

The Bank has asserted that loans will encourage economic 
reforms in favor of the private sector. Yet, none of the money has 
gone to the private sector. All of it is funneled into the government 
bureaucracy which, in turn, wages war against the free market. In 
1989, after small businesses and farms in the private sector had 
begun to flourish and surpass the performance of similar govern- 
ment enterprises, Red China's leaders clamped down on them with 
harsh controls and increased taxes. Vice Premier Yao Yilin 
announced that there was too much needless construction, too 
many private loans, and too much spending on "luxuries" such as 
cars and banquets. To stop these excesses, he said, it would be 
necessary to increase government controls over wages, prices, and 
business activities. 

Then there is the question of why China needs the money in the 
first place. Is it to develop her industry or natural resources? Is it to 
fight poverty and improve the living standard of her citizens? 
James Bovard answers: 

The Bank's defense of its China Policy is especially puzzling 
because China itself is going on a foreign investment binge. The World 
Bank gives China money at zero interest, and then China buys 


property in Hong Kong, the United States, Australia, and elsewhere. 
An economist with Citibank estimated that China's "direct investment 
in property, manufacturing and services [in Hong Kong alone] topped 
$6 billion." In 1984, China had a net outflow of capital of $1 billion. 
Moreover, China has its own foreign aid program, which has given 
more than $6 billion in recent decades, largely to leftist governments. 1 


It is the author's contention that the much heralded demise of 
Communism in the Soviet bloc is a mixture of fact and fantasy. It is 
fact at the bottom level of Communist society where the people, in 
truth, rejected it long ago. The only reason they appeared to 
embrace it for so many years was that they had no choice. As long 
as the Soviets held control of the weapons and the means of 
communication, the people had to accept their fate. 

But at the tip of the pyramid of state power, it is a different 
story. The top Communist leaders have never been as hostile to 
their counterparts in the West as the rhetoric suggests. They are 
quite friendly to the world's leading financiers and have worked 
closely with them when it suits their purposes. As we shall see in 
the following section, the Bolshevik revolution actually was 
financed by wealthy financiers in London and New York. Lenin 
and Trotsky were on the closest of terms with these moneyed 
interests— both before and after the Revolution. Those hidden 
liaisons have continued to this day and occasionally pop to the 
surface when we discover a David Rockefeller holding confidential 
meetings with a Mikhail Gorbachev in the absence of government 
sponsorship or diplomatic purpose. 

It is not unreasonable to imagine a scenario in which the leaders 
of the Communist bloc come to realize they cannot hold themselves 

in power much longer. There comes a point where even physical 
force is not enough, especially when the loyalties of those who hold 
the weapons also begin to falter. With economic gangrene creeping 
up the legs of their socialist systems, they realize they must obtain 
outside financial assistance or perish. 

In such a scenario, quiet agreements can be worked out to the 
mutual advantage of all negotiators. The plan could be as simple as 

a statue-of-liberty play in a college football game: the appearance of 
doing one thing as a cover for accomplishing something else. While 




Americans are prepared to accept such deception on a football 
field, they cannot believe that world financiers and politicians are 
capable of it. The concept is rejected out of hand as a "conspiracy 

Nevertheless, in this scenario, we theorize it is agreed among 
the negotiators that the Soviet Bloc needs financial support. It is 
agreed that the Western nations have the capacity to provide it. It is 
agreed that the best way to move money from the industrialized 
nations into the Soviet bloc is through international agencies such 
as the IMF/World Bank. It is agreed this cannot happen until 
hostility between world systems is replaced by political conver- 
gence. It is agreed that future conflict is wasteful and dangerous to 
all parties. Therefore, it is finally agreed that the Soviet bloc must 
abandon its posture of global aggression while the Western nations 
continue to move toward socialism, necessary steps for the long- 
range goal of merger into a world government. But, in doing so, it 
must be insured that the existing Communist leaders retain control 
over their respective states. 


To that end, they change their public identities to "Social 
Democrats." They speak out against the brutal excesses of their 
predecessors and they offer greater freedom of expression in the 
media. A few dispensable individuals among their ranks are 
publicly purged as examples of the demise of the old order. Sta tes 
that once were held captive by the Soviet Union are allowed to 
break away and then return on a voluntary basis. If any leaders of 
the newly emancipated states prefer true independence instead of 
alignment with Russia, they are replaced. 

No other changes are required. Socialism remains the economic 
system of choice and, although lip service may be given to 
free-market concepts, the economy and all means of production 
remain under state control. The old Communists are now Social 
Democrats and, without exception, they become the leaders in the 
new system. 

The West rejoices, and the money starts to move. As an extra 
bonus, the former Bolsheviks are now hailed by the world as great 
statesmen who put an end to the Cold War, brought freedom to 
their people, and helped to forge a New World Order. 



When did Communism depart? We are not quite sure. All we 
A ow is that one day we opened our newspapers and it was 
accomplished. Social Democrats were everywhere. No one could 
find any Communists. Russian leaders spoke as long-time enemies 
of the old regime. Peristroika was here. Communism was dead. It 
was not killed by an enemy. It voted itself out of existence. It 
committe d suicide! 

Does it not seem strange that Communism fell without a 
struggle? Is it not curious that the system which was born out of 
class conflict and revolution and which maintained itself by force 
and violence for almost a century just went away on its own? 
Communism was not overthrown by people rising up with clubs 
and pitchforks to throw off their yoke of tyranny. There was no 
revolution or counterrevolution, no long period of fragmentation, 
no bloody surges between opposing forces. Poof! It just happened. 
True, there was blood in the streets in those areas where opposing 
groups vied for power, but that was after Communism had 
departed, not before. Such an event had never occurred in history. 
Until then, it had been contrary to the way governments act; 
contrary to the very nature of power which never surrenders 
without a life-and-death struggle. This, indeed, is a great curios- 
ity—which should cause people to think. 

Our premise is that the so-called demise of Communism is a 
Great Deception— not awfully different from many of the others 
that are the focus of this volume. We see it as having been stage 
managed for the purposes outlined previously: the transition to 
world government. In our view, tfivt scenario is the only one that 
makes sense in terms of today's geopolitical realities and the only 
one consistent with the lessons of history. 

We realize, of course, that such a view runs contrary to popular 
opinion and conventional wisdom. For many, it is shocking just to 
hear it spelled out. It would not be possible to convince anyone of 
its truth without extensive evidence. Certainly, such evidence 
abounds, but it is not within the scope of this study. So, now that 
we have stated it, we shall leave it behind merely as a clarification 
of the author's point of view so the reader can step around it if he 



American aid to Eastern European governments, while they 
were still puppet states of the Soviet Union, has been justified by 
the same theory advanced on behalf of China: it would improve 
their economies, show their people a better way of life, and weari 
them from Communism. Advocates of that theory now point to the 
demise of Communism as evidence of the soundness of their plan. 
The truth, however, is that the money did not improve the economy 
and did not show the people a better way of life. In fact, it did not 
help the people in any way. It went directly to their governments 
and was used for government priorities. It strengthened the ruling 
parties and enabled them to solidify their control. 

It is well known that one of the reasons Poland's economy was 
weak is that much of her productive output was shipped to the 
Soviet Union at concessionary prices, primarily to support the 
military. Polish-built tanks fought in the Vietnam war; 20% of the 
Soviet merchant marine was built in Poland; 70% of Poland's 
computer and locomotive production and 80% of her communica- 
tions equipment was shipped to the Soviets; American grain 
purchased by Poland with money borrowed from American banks 
was sent to Cuba. Poland was merely a middle man, a conduit to 
Russia and her satellites. The banks were really funding Russia. 

It was in 1982 that Poland first defaulted on bank loans which 
had been guaranteed by the U.S. government through the Com- 
modity Credit Corporation. Under the terms of the guarantee, 
taxpayers would make payments on any bank loan that went into 
default. That was what the banks were counting on when they 
made those loans, but to classify them as "in default" would 
require the banks to remove them from their books as assets. That 
was unacceptable, because it would make their balance sheets look 
as bad as they really were. So the Treasury agreed to bend the rules 
and make payments without requiring the loans to be in default. 
That was eventually stopped by an irate Congress, but not until the 
Reagan Administration had stalled long enough to pay $400 
million directly to the banks on behalf of Poland. 

In November, 1988, the World Bank made its first loan to 
Poland in the amount of $17.9 million. Three years later, in a 
dramatic demonstration of what the President had meant when he 
advocated "debt forgiveness," the Bush Administration canceled a 



ftdl 70% of the $3.8 billion owed to the United States. Taxpayers 
picked up the bill. 

The same story has been unfolding in all the former Soviet-bloc 
countries. In 1980, for example, just before Hungary was brought 
into the IMF/ World Bank, her annual per-capita GNP was $4,180. 
This was a problem, because the policy of the World Bank was to 
make development loans only to countries that had per-capita 
GNPs of less than $2,650. Not to worry. In 1981, the Hungarian 
government simply revised its statistics downward from $4,180 to 
$2,100.! That was a drop of 50% in one year, surely one of the 
sharpest depressions in world history. Everyone knew it was a lie, 
but no one raised an eyebrow. It was all part of the game. By 1989, 
the Bush Administration had granted "most favored nation" trade 
status to the Hungarian government and established on its behalf a 
special $25 million development fund. 


American banks had always been willing to make loans to the 
Soviet Union, except for short periods of expediency during the 
Cuban Missile Crisis, the Vietnam War, the Soviet invasion of 
Afghanistan, and other minor business interruptions. In 1985, after 
the public had lost interest in Afghanistan, banks of the "free 
world" reopened their loan windows to the Soviets. A $400 million 
package was put together by a consortium of First National of 
Chicago, Morgan Guaranty, Bankers Trust, and Irving Trust— plus 
a London subsidiary of the Royal Bank of Canada. The loan was 
offered at unusually low interest rates "to buy American and 
Canadian grain." 

Public indignation is easily disarmed when the announced 
purpose of a loan to a totalitarian government is to purchase 
commodities from the country where the loan originates — espe- 
cially if the commodity is grain for the assumed purpose of making 
bread or feeding livestock. Who could possibly object to having the 
money come right back to our own farmers and merchants in the 

form of profits? And who could fault a project that provided food 
tor the hungry? 

The deception is subtly appealing. It is true that the money will 
be used— in part at least— to buy grain or other locally produced 

Lst A n° rld Bank courts Eastern Europe," by Jerry Lewis, Wall Street Journal, Au- 


commodities. But the borrowing nations are like a homeowner who 
increases the mortgage on his house "to enlarge his living room." 
He probably will make the addition, but he borrows twice as much 
as he needs so he can also buy a new car. Since the government 
allows a tax deduction on mortgage interest, in effect he now gets a 
tax deduction for the interest paid on his car as well. Likewise, the 
borrowing nations usually borrow more than they need for the 
announced purchase, but they receive all the money at favorable 

Yet, this is not the most serious fault in the transaction. In the 
case of Russia, the grain was no small item on her list of needs. 
After repeated failures of her socialist agriculture, she was not able 
to feed her population. Hungry people are dangerous to a govern- 
ment. Russia needed grain to head off internal revolt far more than 
the homeowner needed to increase the size of his living room. In 
other words, Russia had to have the grain, with or without the loan. 
Without it, she would have had to curtail spending somewhere else 
to obtain the money, most likely in her military. By giving her the 
money "to buy grain," we actually allowed her to spend more 
money on armaments. 

But even that is not the primary flaw in making loans to Russia. 
The bottom line is that most of those loans will never be repaidl As 
we have seen, the name of the game is bailout, and it is as certain as 
the setting sun that, somewhere down the line, Russia will not be 
able to make her payments, and the taxpayers of the industrialized 
nations will be put through the IMF wringer one more time to 
squeeze out the transferred purchasing power. 


In 1990, the U.S. Export-Import Bank announced it would begin 
making direct loans to Russia. Meanwhile, the U.S. Overseas 
Private Investment Corporation was providing free "insurance" to 
private companies that were willing to invest in the ex-Soviet state. 
In other words, it was now doing for industrial corporations what it 
had been doing all along for banks: guaranteeing that, if their 
investments turned sour, the government — make that taxpayers- 
would compensate them for their losses. The limit on that insur- 
ance had been $100 million, a generous figure, indeed. But, to 
encourage an even greater flow of private capital into Russia, the 


Bush Administration authorized unlimited protection for "sound 
American corporate investments." 

If these truly were sound investments, they would not need 
foreign-aid subsidies or government guarantees. What is really 
happening in this play is a triple score: 

1. International lending agencies provide the Social Democrats with 

money to purchase goods and services from American firms. No 
one really expects them to repay. It is merely a clever method of 
redistributing wealth from those who have it to those who 
don't— without those who have it catching on. 

2. American firms do not need money to participate. Since their 

ventures are guaranteed, banks are anxious to loan whatever 
amount of money is required. Efficiency or competitiveness are 
not important factors. Contracts are awarded on the basis of 
political influence. Profits are generous and without risk. 

3. When the Social Democrats eventually default in their contracts 

to the American firms or when the joint venture loses money 
because of socialist mismanagement, the federal government 
provides funds to cover corporate profits and repayment of 
bank loans. 

There you have it: The Social Democrats get the goodies; the 
corporations get the profits, and the banks get the interest on 
money created out of nothing. You know what the taxpayers get! 

By 1992, the wearisome pattern was clearly visible. Writing in 
the New York Times, columnist Leslie H. Gelb gave the numbers: 

The ex-Soviet states are now meeting only 30 percent of their 
interest payments (and almost no principal) on debts to the West of 
$70 billion.... Various forms of Western aid to the ex-Soviet states 
totaled about $50 billion in the last 20 months, and the money has 
virtually disappeared without a trace or a dent on the economic 

The interesting thing about this report is that Leslie Gelb has 
been a member of the CFR since 1973. Why would a CFR 
spokesman blow the whistle on one of their most important 
maneuvers toward The New World Order? The answer is that he is 
doing just the opposite. Actually he is making a plea for more loans 

J- "The Russian Sinkhole," by Leslie H. Gelb, New York Times, March 30,1992, p. 


and more outright aid on the basis that the need is so great! He 
advocates the prioritizing of funding with first attention to aiding 
Russia's nuclear-power facilities, agriculture, and industrial capac- 
ity. At the end of his article, he writes: "The stakes could not be 
higher. All the more reason for substantial, practical and immediate 
aid — not for grand illusions." 

Congress hears and obeys. In spite of the fact that all the 
preceding billions have "disappeared without a trace or a dent," 
the transfusion continues. In 1993 the World Bank advanced 
another half-billion-dollar loan to Russia; before leaving office, 
President Bush arranged for another $2 billion loan through the 
Export-Import Bank; and Congress authorized hitting the voters 
with another $2.5 billion in foreign aid earmarked specifically for 
Russia. In July, at the Tokyo summit meeting of the Group-of- 
Seven industrialized nations, another $24 billion was promised, 
half of which will come from the IMF. As this book goes to print, 
there is no end in sight. 

A moment's reflection on the events described in this section 
leads us to a crossroads of conscience. We must choose between 
two paths. Either we conclude that Americans have lost control 
over their government, or we reject this information as a mere 
distortion of history. In the first case, we become advocates of the 
conspiratorial view of history. In the latter, we endorse the acciden- 
tal view. It is a difficult choice. 

The reason it is difficult is that we have been conditioned to 
laugh at conspiracy theories, and few people will risk public 
ridicule by advocating them. On the other hand, to endorse the 
accidental view is absurd. Almost all of history is an unbroken trail 
of one conspiracy after another. Conspiracies are the norm, not the 

The industrialized nations of the world are being bled to near 
death in a global transfer of their wealth to the less developed 
countries. Is it being done according to plan? Or is it an accident? It 
is not being done to them by their enemies. It is being done by their 
own leaders. The process is well coordinated across national lines 
and perfectly dovetails with the actions of other leaders who are 
doing the same thing to their respective countries. Furthermore, 
these leaders regularly meet together to better coordinate their 


activities. Could anything that complex be accomplished by acci- 
dent? Or would some kind of a plan be required? 

A spokesman from the IMF would answer, yes, there is a plan, 
and it is to aid the less developed countries. But, after forty years 
and hundreds of billions of dollars, they have totally failed to 
accomplish that goal. Would intelligent people believe that pursu- 
ing the same plan will produce different results in the future? Then 
why do they follow a plan that cannot work? The answer is they are 
not following that plan. They are following a different one: one 
which has been very successful from their point of view. Other- 
wise, we must conclude that the leaders of the industrialized 
nations are, to a man, just plain stupid. We do not believe it. 

There is little room to escape the conclusion that these men and 
women are following a higher loyalty than the self interest of their 
respective countries. In their hearts they may honestly believe that, 
in the long run, the world will be better for it, including their fellow 
countrymen. But, for the present, their goals and their methods are 
not shared by those who have placed them in office. Under those 
circumstances, they must conceal their plan from public view. If 
their fellow citizens really knew what they were doing, they would 
be thrown out of office and, in some cases, might even be shot as 
traitors. Add all that together and it spells CONSPIRACY. 

The only other explanation is that it's all accidental: no plan, no 
cooperation, no goal, just the blind forces of history following the 
path of least resistance. For some it will be easier and more 
comfortable to accept that model. But the evidence speaks loudly 
against it. What is the evidence? Not just the previous chapters, but 
everything that follows in this book. By contrast, the evidence for 
the accidental theory of history is — a blank page. 


The international version of the game called Bailout is similar to 
the domestic version in that the overall objective is to have the 
taxpayers cover the defaulted loans so that interest payments can 
continue going to the banks. The differences are: (1) instead of 
justifying this as protecting the American public, the pretense is 
that i t is to save the world from poverty; and (2) the main money 
pipeline goes from the Federal Reserve through the IMF/ World 
Bank. Otherwise, the rules are basically the same. 


There is another dimension to the game, however, that involves 
more than mere profits and scam. It is the conscious and deliberate 
evolution of the IMF/ World Bank into a world central bank with 
the power to issue a world fiat currency. And that is an important 
step in an even larger plan to build a true world government within 
the framework of the United Nations. 

Economically strong nations are not candidates for surrender- 
ing their sovereignty to a world government. Therefore, through 
"loans" that will never be paid back, the IMF/World Bank directs 
the massive transfer of wealth from the industrialized nations to 
the less developed nations. This ongoing process eventually drains 
their economies to the point where they also will be in need of 
assistance. No longer capable of independent action, they will 
accept the loss of sovereignty in return for international aid. 

The less developed countries, on the other hand, are being 
brought into The New World Order along an entirely different 
route. Many of these countries are ruled by petty tyrants who care 
little for their people except how to extract more taxes from them 
without causing a revolt. Loans from the IMF/ World Bank are 
used primarily to perpetuate themselves and their ruling parties in 
power — and that is exactly what the IMF/ World Bank intends. 
Rhetoric about helping the poor notwithstanding, the true goal of 
the transfer of wealth disguised as loans is to get control over the 
leaders of the less developed countries. After these despots get 
used to the taste of such an unlimited supply of sweet cash, they 
will never be able to break the habit. They will be content— already 
are content— to become little gold-plated cogs in the giant machin- 
ery of world government. Ideology means nothing to them: capital- 
ist, communist, socialist, fascist, what does it matter so long as the 
money keeps coming. The IMF/World Bank literally is buying these 
countries and using our money to do it. 

The recent inclusion of Red China and the former Soviet bloc on 
the list of IMF/World Bank recipient countries signals the final 
phase of the game. Now that Latin America and Africa have been 
"purchased" into the New World Order, this is the final frontier. In 
a relatively short time span, China, Russia, and the Eastern 
European countries have now become the biggest borrowers and/ 
already, they are in arrears on their payments. This is where the 
action will lie in the months ahead. 

Section II 


The eight chapters contained in this and the 
following section deal with material that is 
organized by topic, not chronology. Several of 
them will jump ahead of events that are not 
covered until later. Furthermore, the scope is such 
that the reader may wonder what, if any, is the 
connection with the Federal Reserve System. 
Please be patient. The importance will eventually 
become clear. It is the author's intent to cover 
concepts and principles before looking at events. 
Without this background, the history of the 
Federal Reserve is boring. With it, the story 
emerges as an exciting drama which profoundly 
affects our lives today. So let us begin this 
adventure with a few discoveries about the 
nature of money itself. 

Chapter Seven 


The history and evolution of money; the emer- 
gence of gold as the universal money supply; the 
attempts by governments to cheat their subjects 
by clipping or debasing gold coins; the reality that 
any quantity of gold will suffice for a monetary 
system and that "more money" does not require 
more gold. 

There is a great mystique surrounding the nature of money. It is 
generally regarded as beyond the understanding of mere mortals. 
Questions of the origin of money or the mechanism of its creation 
are seldom matters of public debate. We accept them as facts of life 
which are beyond our sphere of control. Thus, in a nation which is 
founded on the principle of government by the people, and which 
assumes a high level of understanding among the electorate, the 
people themselves have blocked out one of the most important 
factors affecting, not only their government, but their personal lives 
as well. 

This attitude is not accidental, nor was it always so. There was a 
time in the fairly recent past when the humble voter — even without 
formal education — was well informed on money matters and 
vitally concerned about their political implementation. In fact, as 
we shall see in a later chapter, major elections were won or lost 
depending on how candidates stood on the issue of a central bank. 
It has been in the interest of the money mandarins, however, to 
convince the public that, now, these issues are too complicated for 
novices. Through the use of technical jargon and by hiding simple 
reality inside a maze of bewildering procedures, they have caused 
an understanding of the nature of money to fade from the public 


The first step in this maneuver was to scramble the definition of 
money itself. For example, the July 20, 1975 issue of the Nezv York 


Times, in an article entitled "Money Supply: A Growing Muddle," 
begins with the question: "What is money nowadays?" The Wall 
Street Journal of August 29, 1975, comments: "The men and women 
involved in this arcane exercise [of watching the money supply] 
aren't exactly sure what the money supply consists of." And, in its 
September 24, 1971 issue, the same paper said: "A pro-International 
Monetary Fund Seminar of eminent economists couldn't agree on 
what money is or how banks create it." 

Even the government cannot define money. Some years ago, a 
Mr. A.F. Davis mailed a ten-dollar Federal Reserve Note to the 
Treasury Department. In his letter of transmittal, he called attention 
to the inscription on the bill which said that it was redeemable in 
"lawful money," and then requested that such money be sent to 
him. In reply, the Treasury merely sent two five-dollar bills from a 
different printing series bearing a similar promise to pay. Mr. Davis 

Dear Sir: 

Receipt is hereby acknowledged of two $5.00 United States notes, 
which we interpret from your letter are to be considered as lawful 
money. Are we to infer from this that the Federal Reserve notes are not 
lawful money? 

I am enclosing one of the $5.00 notes which you sent to me. I note 
that it states on the face, "The United States of America will pay to (he 
bearer on demand five dollars." I am hereby demanding five dollars. 

One week later, Mr. Davis received the following reply from 
Acting Treasurer, M.E. Slindee: 

Dear Mr. Davis: 

Receipt is acknowledged of your letter of December 23rd, 
transmitting one $5. United States Note with a demand for payment of 
five dollars. You are advised that the term "lawful money" has not 
been defined in federal legislation.... The term "lawful currency" no 
longer has such special significance. The $5. United States Note 
received with your letter of December 23rd is returned herewith. 

The phrases "...will pay to the bearer on demand" and "... is 
redeemable in lawful money" were deleted from our currency 
altogether in 1964. 

1. As quoted by C.V. Myers, Money and Energy: Weathering the Storm (Darien, 
Connecticut: Soundview Books, 1980), pp. 161,163. Also by Lawrence S. Ritter, ed-, 
Money and Economic Activity (Boston: Houghton Mifflin, 1967), p. 33. 



Is money really so mysterious that it cannot be defined? Is it the 
coin and currency we have in our pockets? Is it numbers in a 
checking account or electronic impulses in a computer? Does it 
include the balance in a savings account or the available credit on a 
charge card? Does it include the value of stocks and bonds, houses, 
land, or personal possessions? Or is money nothing more than 
purchasing power? 

The main function of the Federal Reserve is to regulate the 
supply of money. Yet, if no one is able to define what money is, 
how can we have an opinion about how the System is performing? 
The answer, of course, is that we cannot, and that is exactly the way 
the cartel wants it. 

The reason the Federal Reserve appears to be a complicated 
subject is because most discussions start somewhere in the middle. 
By the time we get into it, definitions have been scrambled and 
basic concepts have been assumed. Under such conditions, intellec- 
tual chaos is inevitable. If we start at the beginning, however, and 
deal with each concept in sequence from the general to the specific, 
and if we agree on definitions as we go, we shall find to our 
amazement that the issues are really quite simple. Furthermore, the 
process is not only painless, it is — believe it or not — intensely 

The purpose of this and the next three chapters, therefore, is to 
provide what could be called a crash course on money. It will not be 
complicated. In fact, you already know much of what follows. All 
we shall attempt to do is tie it all together so that it will have 
continuity and relativity to our subject. When you are through with 
these next few pages, you zvill understand money. That's a promise. 

So, let's get started with the basics. What is money? 


The dictionary is of little help. If economists cannot agree on 
what money is, it is partly due to the fact that there are so many 
definitions available that it is difficult to insist that any of them is 
the obvious choice. For the purpose of our analysis, however, it will 

be necessary to establish one definition so we can at least know 
what is meant when the word is used within this text. To that end, 
we shall introduce our own definition which has been assembled 
from bits and dabs taken from numerous sources. The structure is 
designed, not to reflect what we think money ought to be or to 


support the view of any particular school of economics, but simply 
to reduce the concept to its most fundamental essence and to reflect 
the reality of today's world. It is not necessary to agree or disagree 
with this definition. It is introduced solely for the purpose of 
providing an understanding of the word as it is used within these 
pages. This, then, shall be our working definition: 

Money is anything which is accepted as a medium of exchange 
and it may be classified into the following forms: 

1. Commodity money 

2. Receipt money 

3. Fiat money 

4. Fractional money 

Understanding the difference between these forms of money is 
practically all we need to know to fully comprehend the Federal 
Reserve System and to come to a judgment regarding its value to 
our economy and to our nation. Let us, therefore, examine each of 
them in some detail. 


Before there was any kind of money, however, there was barter, 
and it is important first to understand the link between the two. 
Barter is defined as that which is directly exchanged for something 
of like value. Mr. Jones swaps his restored Model-T Ford for a 
Steinway grand piano. 1 This exchange is not monetary in nature 
because both items are valued for themselves rather than held as a 
medium of exchange to be used later for something else. Note, 
however, that both items have intrinsic value or they would not be 
accepted by the other parties. Labor also may be exchanged as 
barter when it, too, is perceived to have intrinsic value to the 
person for whom the labor is performed. The concept of intrinsic 
value is the key to an understanding of the various forms of money 
that evolved from the process of barter. 


In the natural evolution of every society, there always have 
been one or two items which became more commonly used i n 

1. Strictly speaking, each party holds the value of what he is receiving to be more 
than what he is giving. Otherwise he would not make the trade. In the mind of th e 
traders, therefore, the items have unequal value. That opinion is shared equally 
them both. The shorter explanation, however, is less unwieldy. 



barter than all others. This was because they had certain charac- 
teristics which made them useful or attractive to almost everyone. 
Eventually, they were traded, not for themselves, but because they 
represented a storehouse of value which could be exchanged at a 
later time for something else. At that point, they ceased being 
barter and became true money. They were, according to our 
working definition, a medium of exchange. And, since that medium 
was a commodity of intrinsic value, it may be described as 
commodity money. 

Among primitive people, the most usual item to become 
commodity money was some form of food, either produce or 
livestock. Lingering testimony to this fact is our word pecuniary, 
which means pertaining to money. It is derived from the word 
pecunia, which is the Latin word for cow. 

But, as society progressed beyond the level of bare existence, 
items other than food came into general demand. Ornaments were 
occasionally prized when the food supply was ample, and there is 
evidence of some societies using colored sea shells and unusual 
stones for this purpose. But these never seriously challenged the 
use of cattle, or sheep, or corn, or wheat, because these staples 
possessed greater intrinsic value for themselves even if they were 
not used as money. 


Eventually, when man learned how to refine crude ores and to 
craft them into tools or weapons, the metals themselves became of 
value. This was the dawning of the Bronze Age in which iron, 
copper, tin, and bronze were traded between craftsmen and 
merchants along trade routes and at major sea ports. 

The value of metal ingots was originally determined by weight. 
Then, as it became customary for the merchants who cast them to 
stamp the uniform weights on the top, they eventually were valued 
simply by counting their number. Although they were too large to 
carry in a pouch, they were still small enough to be transported 
easily and, in this form, they became, in effect, primitive but 
functional coins. 

The primary reason metals became widely used as commodity 
money is that they meet all of the requirements for convenient 
trading. In addition to being of intrinsic value for uses other than 
money, they are not perishable, which is more than one can say for 


cows; by melting and reforming they can be divided into smaller 
units and conveniently used for purchases of minor items, which is 
not possible with diamonds, for example; and, because they are not 
in great abundance, small quantities carry high value, which means 
they are more portable than such items as timber, for example. 

Perhaps the most important monetary attribute of metals, 
however, is their ability to be precisely measured. It is important to 
keep in mind that, in its fundamental form and function, money is 
both a storehouse and a measure of value. It is the reference by 
which all other things in the economy can be compared. It is 
essential, therefore, that the monetary unit itself be both measur- 
able and constant. The ability to precisely assay metals in both 
purity and weight makes them ideally suited for this function, 
Experts may haggle over the precise quality of a gemstone, but an 
ingot of metal is either 99% pure or it isn't, and it either weighs 100 
ounces or it doesn't. One's opinion has little to do with it. It is not 
without reason, therefore, that, on every continent and throughout 
history, man has chosen metals as the ideal storehouse and 
measure of value. 


There is one metal, of course, that has been selected by 
centuries of trial and error above all others. Even today, in a world 
where money can no longer be defined, the common man instinc- 
tively knows that gold will do just fine until something better 
comes along. We shall leave it to the sociologists to debate why gold 
has been chosen as the universal money. For our purposes, it is 
only important to know that it has been. But we should not 
overlook the possibility that it was an excellent choice. As for 
quantity, there seems to be just the right amount to keep its value 
high enough for useful coinage. It is less plentiful than silver 
—which, incidentally, has run a close second in the monetary 
contest— and more abundant than platinum. Either could have 
served the purpose quite well, but gold has provided what appears 
to be the perfect compromise. Furthermore, it is a commodity in 
great demand for purposes other than money. It is sought for both 
industry and ornament, thus assuring its intrinsic value under all 
conditions. And, of course, its purity and weight can be precisely 




It often is argued that gold is inappropriate as money because it 
is too limited in supply to satisfy the needs of modern commerce. 
On the surface, that may sound logical — after all, we do need a lot 
of money out there to keep the wheels of the economy turning — 
but, upon examination, this turns out to be one of the most childish 
ideas imaginable. 

First of all, it is estimated that approximately 45% of all the gold 
mined throughout the world since the discovery of America is now 
in government or banking stockpiles. 1 There undoubtedly is at 
least an additional 30% in jewelry, ornaments, and private hoards. 
Any commodity which exists to the extent of 75% of its total world 
production since Columbus discovered America can hardly be 
described as in short supply. 

The deeper reality, however, is that the supply is not even 
important. Remember that the primary function of money is to 
measure the value of the items for which it is exchanged. In this 
sense, it serves as a yardstick or ruler of value. It really makes no 
difference if we measure the length of our rug in inches, feet, yards, 
or meters. We could even manage it quite well in miles if we used 
decimals and expressed the result in millimiles. We could even use 
multiple rulers, but no matter what measurement we use, the 
reality of what we are measuring does not change. Our rug does 
not become larger just because we have increased the quantity of 
measurement units by painting additional markers onto our rulers. 

If the supply of gold in relation to the supply of available goods 

is so small that a one-ounce coin would be too valuable for minor 
transactions, people simply would use half-ounce coins or tenth- 
ounce coins. The amount of gold in the world does not affect its 
ability to serve as money, it only affects the quantity that will be 
used to measure any given transaction. 

Let us illustrate the point by imagining that we are playing a 
game of Monopoly. Each person has been given a starting supply 
of play money with which to transact business. It doesn't take long 
before we all begin to feel the shortage of cash. If we just had more 
money, we could really wheel and deal. Let us suppose further that 
someone discovers another game-box of Monopoly sitting in the 

L Elgin Groseclose, Money and Man: A survey of Monetary Experience, 4th ed. 
Oklahoma: University of Oklahoma Press, 1976), p. 259. 


closet and proposes that the currency from that be added to the 
game under progress. By general agreement, the little bills are 
distributed equally among all players. What would happen? 

The money supply has now been doubled. We all have twice as 
much money as we did a moment before. But would we be any 
better off? There is no corresponding increase in the quantity of 
property, so everyone would bid up the prices of existing pieces 
until they became twice as expensive. In other words, the law of 
supply and demand would rapidly seek exactly the same equilib- 
rium as existed with the more limited money supply. When the 
quantity of money expands without a corresponding increase in 
goods, the effect is a reduction in the purchasing power of each 
monetary unit. In other words, nothing really changes except that 
the quoted price of everything goes up. But that is merely the quoted 
price, the price as expressed in terms of the monetary unit. In truth, 
the real price, in terms of its relationship to all other prices, remains 
the same. It's merely that the relative value of the money supply 
has gone down. This, of course, is the classic mechanism of 
inflation. Prices do not go up. The value of the money goes down. 

If Santa Claus were to visit everyone on Earth next Christmas 
and leave in our stockings an amount of money exactly equal to the 
amount we already had, there is no doubt that many would rejoice 
over the sudden increase in wealth. By New Year's day, however, 
prices would have doubled for everything, and the net result on the 
world's standard of living would be exactly zero. 1 

The reason so many people fall for the appealing argument that 
the economy needs a larger money supply is that they zero in only 
on the need to increase their supply. If they paused for a moment to 
reflect on the consequences of the total supply increasing, the 
nonsense of the proposal becomes immediately apparent. 

Murray Rothbard, professor of economics at the University of 
Nevada at Las Vegas, says: 

We come to the startling truth that it doesn't matter what the supply 
of money is. Any supply will do as well as any other supply. The free 
market will simply adjust by changing the purchasing power, ot 
effectiveness, of its gold-unit. There is no need whatever for any 
planned increase in the money supply, for the supply to rise to offset 

1. Those who rushed to market first, however, would benefit temporarily from 
old prices. Under inflation, those who save are punished. 



any condition, or to follow any artificial criteria. More money does not 
supply more capital, is not more productive, does not permit 
"economic growth." 


The Federal Reserve claims that one of its primary objectives is 
to stabilize prices. In this, of course, it has failed miserably. The 
irony, however, is that maintaining stable prices is the easiest thing 
in the world. All we have to do is stop tinkering with the money 
supply and let the free market do its job. Prices become automat- 
ically stable under a commodity money system, and this is particu- 
larly true under a gold standard. 

Economists like to illustrate the workings of the marketplace by 
creating hypothetical micro and macro economies in which every- 
thing is reduced to only a few factors and a few people. In that 
spirit, therefore, let us create a hypothetical economy consisting of 
only two classes of people: gold miners and tailors. Let us suppose 
that the law of supply and demand has settled on the value of one 
ounce of gold to be equal to a fine, custom-tailored suit of clothes. 
That means that the labor, tools, materials, and talent required to 
mine and refine one ounce of gold are equally traded for the labor, 
tools, and talent required to weave and tailor the suit. Up until 
now, the number of ounces of gold produced each year have been 
roughly equal to the number of fine suits made each year, so prices 
have remained stable. The price of a suit is one ounce of gold, and 
the value of one ounce of gold is equal to one finely-tailored suit. 

Let us now suppose that the miners, in their quest for a better 
standard of living, work extra hours and produce more gold this 
year than previously— or that they discover a new lode of gold 
which greatly increases the available supply with little extra effort. 
Now things are no longer in balance. There are more ounces of gold 

than there are suits. The result of this expansion of the money 
supply over and above the supply of available goods is the same as 

in our game of Monopoly. The quoted prices of the suits go up 
because the relative value of the gold has gone down. 

The process does not end there, however. When the miners see 
that they are no better off than before in spite of the extra work, and 
especially when they see the tailors making a greater profit for no 

CowlH rra y. R <"i'i"" d ' wha ' Has Government Done to Our Money'? (Larkspur 
radA l>me Tree Tress, 1964), p. 13. F 


increase in labor, some of them decide to put down their picks and 
turn to the trade of tailoring. In other words, they are responding to 
the law of supply and demand in labor. When this happens, the 
annual production of gold goes down while the production of suits 
goes up, and an equilibrium is reached once again in which suits 
and gold are traded as before. The free market, if unfettered by 
politicians and money mechanics, will always maintain a stable 
price structure which is automatically regulated by the underlying 
factor of human effort. The human effort required to extract one 
ounce of gold from the earth will always be approximately equal to 
the amount of human effort required to provide the goods and 
services for which it is freely exchanged. 


A perfect example of how commodities tend to self-regulate 
their value occurred in Germany at the end of World War II. The 
German mark had become useless, and barter was common. But 
one item of exchange, namely cigarettes, actually became a com- 
modity money, and they served quite well. Some cigarettes were 
smuggled into the country, but most of them were brought in by 
U.S. servicemen. In either case, the quantity was limited and the 
demand was high. A single cigarette was considered small change. 
A package of twenty and a carton of two hundred served as larger 
units of currency. If the exchange rate began to fall too low— in 
other words, if the quantity of cigarettes tended to expand at a rate 
faster than the expansion of other goods — the holders of the 
currency, more than likely, would smoke some of it rather than 
spend it. The supply would diminish and the value would return to 
its previous equilibrium. That is not theory, it actually happened. 

With gold as the monetary base, we would expect that 
improvements in manufacturing technology would gradually 
reduce the cost of production, causing, not stability, but a downward 
movement of all prices. That downward pressure, however, is 
partially offset by an increase in the cost of the more sophisticated 
tools that are required. Furthermore, similar technological efficien- 
cies are being applied in the field of mining, so everything tends to 
balance out. History has shown that changes in this natural 
equilibrium are minimal and occur only gradually over a long 

1. See Galbraith, p. 250. 



period of time. For example, in 1913, the year the Federal Reserve 
was enacted into law, the average annual wage in America was 
$633. The exchange value of gold that year was $20.67. That means 
that the average worker earned the equivalent of 30.6 ounces of 
gold per year. 

In 1990, the average annual wage had risen to $20,468. That is a 
whopping increase of 3,233 per cent, an average rise of 42 per cent 
each year for 77 years. But the exchange value of gold in 1990 had 
also risen. It was at $386.90 per ounce. The average worker, 
therefore, was earning the equivalent of 52.9 ounces of gold per 
year. That is an increase of only 73 per cent, a rise of less than 1 per 
cent per year over that same period. It is obvious that the dramatic 
increase in the size of the paycheck was meaningless to the average 
American. The reality has been a small but steady increase in 
purchasing power (about 1 per cent per year) that has resulted from 
the gradual improvement in technology. This and only this has 
improved the standard of living and brought down real prices — as 
revealed by the relative value of gold. 

In areas where personal service is the primary factor and where 
technology is less important, the stability of gold as a measure of 
value is even more striking. At the Savoy Hotel in London, one 
gold sovereign will still buy dinner for three, exactly as it did in 
1913. And, in ancient Rome, the cost of a finely made toga, belt, and 
pair of sandals was one ounce of gold. That is almost exactly the 
same cost today, two-thousand years later, for a hand-crafted suit, 
belt, and a pair of dress shoes. There are no central banks or other 
human institutions which could even come close to providing that 
kind of price stability. And, yet, it is totally automatic under a gold 

In any event, before leaving the subject of gold, we should 
acknowledge that there is nothing mystical about it. It is merely a 
commodity which, because it has intrinsic value and possesses 
certain qualities, has become accepted throughout history as a 
medium of exchange. Hitler waged a campaign against gold as a 
tool of the Jewish bankers. But the Nazis traded heavily in gold and 
largely financed their war machine with it. Lenin claimed that gold 

was used only to keep the workers in bondage and that, after the 
revolution, it would be used to cover the floors of public lavatories. 

The Soviet Union under Communism became one of the world's 
biggest producers and users of gold. Economist John Maynard 


Keynes once dismissed gold as a "barbaric metal." Many followers 
of Keynes today are heavily invested in gold. It is entirely possible, 
of course, that something other than gold would be better as the 
basis for money. It's just that, in over two thousand years, no orte 
has been able to find it. 

The amazing stability of gold as a measure of value is simply 
the result of human nature reacting to the forces of supply and 
demand. The process, therefore, may be stated as a natural law of 
human behavior: 

LESSON: When gold (or silver) is used as money and when 
the forces of supply and demand are not thwarted by 
government intervention, the amount of new metal added to the 
money supply will always be closely proportional to the 
expanding services and goods which can be purchased witli it 
Long-term stability of prices is the dependable result of these 
forces. This process is automatic and impartial. Any attempt by 
politicians to intervene will destroy the benefit for all. 

LAW: Long-term price stability is possible only when the 
money supply is based upon the gold (or silver) supply without 
government interference. 

As the concept of money was slowly developing in the mind of 
ancient man, it became obvious that one of the advantages of using 
gold or silver as the medium of exchange was that, because of their 
rarity as compared to copper or iron, great value could be 
represented by small size. Tiny ingots could be carried in a pouch 
or fastened to a belt for ease of transportation. And, of course, they 
could be more readily hidden for safekeeping. Goldsmiths then 
began to fashion them into round discs and to put their stamps on 
them to attest to purity and weight. In this way, the world's first 
coins began to make their appearance. 

It is believed that the first precious metal coins were minted by 
the Lydians in Asia Minor (now Northwest Turkey), in about 600 
B.C. The Chinese used gold cubes as early as 2100 B.C But it wasn't 
until the kings stepped into the picture that true coinage became a 
reality. It was only when the state certified the tiny discs that they 
became widely accepted, and it is to the Greeks more than anyone 
that we owe this development. Groseclose describes the result: 



These light, shining discs, adorned with curious new emblems and 
a variety of vigorous, striking images, made a deep impression on 
both Greek and barbarian. And to the more practical minded, the 
abundance of uniform pieces of metal, each of a standard weight, 
certified by the authority of the state, meant a release from the 
cumbersomeness of barter and new and dazzling opportunities in 
every direction.... 

All classes of men succumbed to money, and those who had 
formerly been content to produce only for their needs and the 
necessities of the household, found themselves going to the market 
place with their handicraft, or the fruits of their toil, to exchange them 
for the coins they might obtain. 1 


From the very beginning, the desire for a larger money supply 
led to practices which were destructive to the economy. Unscrupu- 
lous merchants began to shave off a tiny portion of each coin they 
handled — a process known as coin clipping — and then having the 
shavings melted down into new coins. Before long, the king's 
treasury began to do the same thing to the coins it received in taxes. 
In this way, the money supply was increased, but the supply of 
gold was not. The result was exactly what we now know always 
happens when the money supply is artificially expanded. There 
was inflation. Whereas one coin previously would buy twelve 
sheep, now it would only be accepted for ten. The total amount of 
gold needed for twelve sheep never really changed. It's just that 
everyone knew that one coin no longer contained it. 

As governments became more brazen in their debasement of 
the currency, even to the extent of diluting the gold or silver 
content, the population adapted quite well by simply "discount- 
ing" the new coins. That is to say, they accepted them at a realistic 
value, which was lower than what the government had intended. 
This was, as always, reflected in a general rise in prices quoted in 
terms of those coins. Real prices, in terms of labor or other goods or 
even of gold itself remained unchanged. 

Governments do not like to be thwarted in their plans to exploit 
their subjects. So a way had to be found to force people to accept 
these slugs as real money. This led to the first legal-tender laws. By 
royal decree, the "coin of the realm," was declared legal for the 

1 Groseclose, Money and Man, p. 13. 


settlement of all debts. Anyone who refused it at face value was 
subject to fine, imprisonment, or, in some cases, even death. The 
result was that the good coins disappeared from circulation and 
went into private hoards. After all, if the government forces you to 
accept junk at the same rate of exchange as gold, wouldn't you 
keep the gold and spend the junk? That is what happened in 
America in the '60s when the mint began to issue cheap metal 
tokens to replace the silver dimes, quarters, and half-dollars. 
Within a few months, the silver coins were in dresser drawers and 
safe-deposit boxes. The same thing has happened repeatedly 
throughout antiquity. In economics, that is called Gresham's Law 
"Bad money drives out good." 

The final move in this game of legal plunder was for the 
government to fix prices so that, even if everyone is using only junk 
as money, they can no longer compensate for the continually 
expanding supply of it. Now the people were caught. They had no 
escape except to become criminals, which most of them, inciden- 
tally, chose to do. The history of artificially expanding money is the 
history of great dissatisfaction with government, much lawlessness, 
and a massive underground economy. 


In more modern times, rulers of nations have become more 
sophisticated in the methods by which they debase the currency. 
Instead of clipping coins, it is done through the banking system. 
The consequences of that process were summarized in 1966 by Alan 
Greenspan who, a few years later, would became Chairman of the 
Board of Governors of the Federal Reserve. Greenspan wrote: 

The abandonment of the gold standard made it possible for the 
welfare statists to use the banking system as a means to an unlimited 
expansion of credit.... 

The law of supply and demand is not to be conned. As the supply 
of money (of claims) increases relative to the supply of tangible assets 
in the economy, prices must eventually rise. Thus the earnings saved 
by the productive members of the society lose value in terms of goods- 
When the economy's books are finally balanced, one finds that this 
loss in value represents the goods purchased by the government for 
welfare or other purposes.... 

In the absence of the gold standard, there is no way to protect 
savings from confiscation through inflation. There is no safe store of 
value. If there were, the government would have to make its holding 
illegal, as was done in the case of gold.... The financial policy of the 



welfare state requires that there be no way for the owners of wealth to 
protect themselves. 

This is the shabby secret of the welfare statists' tirades against 
gold. Deficit spending is simply a scheme for the "hidden" 
confiscation of wealth. Gold stands in the way of this insidious 
process. It stands as a protector of property rights. 

Unfortunately, when Greenspan was appointed as Chairman of 
the Federal Reserve System, he became silent on the issue of gold. 
Once he was seated at the control panel which holds the levers of 
power, he served the statists well as they continued to confiscate 
the people's wealth through the hidden tax of inflation. Even the 
wisest of men can be corrupted by power and wealth. 


Returning to the topic of debasing the currency in ancient 
times, it must be stated that such practices were by no means 
universal. There are many examples throughout history of regents 
and kingdoms which used great restraint in money creation. 
Ancient Greece, where coinage was first developed, is one of them. 
The drachma became the defacto monetary unit of the civilized 
world because of the dependability of its gold content. Within its 
borders, cities flourished and trade abounded. Even after the fall of 
Athens in the Peloponnesian War, her coinage remained, for 
centuries, as the standard by which all others were measured. 2 

Perhaps the greatest example of a nation with sound money, 
however, was the Byzantine Empire. Building on the sound mone- 
tary tradition of Greece, the emperor Constantine ordered the 
creation of a new gold piece called the solidus and a silver piece 
called the miliarense. The gold weight of the solidus soon became 
fixed at 65 grains and was minted at that standard for the next 
eight-hundred years. Its quality was so dependable that it was 
freely accepted, under the name bezant, from China to Brittany, 
from the Baltic Sea to Ethiopia. 

Byzantine laws regarding money were strict. Before being 
admitted to the profession of banking, the candidate had to have 
sponsors who would attest to his character, that he would not file 

Ideal, ed. Ayn Rand (New York: Signet Books, 1967), p. 101. 

2. Even the Greeks under Solon had one, brief experience with a debased cur- 
rency. But it was short lived and never repeated - See Groseclose, Money and Man, pp. 14, 
20, 54. 


or chip either the solidi or the miliarensia, and that he would not 
issue false coin. Violation of these rules called for cutting off a 
hand. 1 

It is an amazing fact of history that the Byzantine Empire 
flourished as the center of world commerce for eight-hundred 
years without falling into bankruptcy nor, for that matter, even into 
debt. Not once during this period did it devalue its money. 
"Neither the ancient nor the modern world," says Heinrich Gelzer, 
"can offer a complete parallel to this phenomenon. This prodigious 
stability... secured the bezant as universal currency. On account of its 
full weight, it passed with all the neighboring nations as a valid 
medium of exchange. By her money, Byzantium controlled both the 
civilized and the barbarian worlds." 2 


The experience of the Romans was quite different. Basically a 
militaristic people, they had little patience for the niceties of 
monetary restraint. Especially in the later Empire, debasement of 
the coinage became a deliberate state policy. Every imaginable 
means for plundering the people was devised. In addition to 
taxation, coins were clipped, reduced, diluted, and plated. Favored 
groups were given franchises for state-endorsed monopolies, the 
origin of our present-day corporation. And, amidst constantly 
rising prices in terms of constantly expanding money, speculation 
and dishonesty became rampant. 

By the year 301 AD, mutiny was developing in the army, 
remote regions were displaying disloyalty, the treasury was empty, 
agriculture depressed, and trade almost at a standstill. It was then 
that Diocletian issued his famous price-fixing proclamation as the 
last measure of a desperate emperor. We are struck by the 
similarity to such proclamations in our own time. Most of the chaos 
can be traced directly to government policy. Yet, the politicians 
point the accusing finger at everyone else for their "greed" arid 
"disregard for the common good." Diocletian declared: 

1. Le livre du prefet on lempereur Leon le Sage sur les corporations de cmnmumpie' 
French translation from the Geneva text by Jules Nicole, p. 38. Cited by Groseclose. 
Money and Man, p. 52. 

2. Byzantininsche Kulturgeschichte (Tubingen, 1909), p. 78. As quoted by Grose- 
close, Money and Man, p. 54. 



Who is of so hardened a heart and so untouched by a feeling of 
humanity that he can be unaware, nay that he has not noticed, that in 
the sale of wares which are exchanged in the market, or dealt with in 
the daily business of the cities, an exorbitant tendency in prices has 
spread to such an extent that the unbridled desire of plundering is 
held in check neither by abundance nor by seasons of plenty.... 
Inasmuch as there is seen only a mad desire without control, to pay no 
heed to the needs of the many,. seems good to us, as we look into the 
future, to us who are the fathers of the people, that justice intervene to 
settle matters impartially. 1 

What followed was an incredibly detailed list of mandated 
prices for everything from a serving of beer or a bunch of 
watercress to a lawyer's fee and a bar of gold. The result? 
Conditions became even worse, and the royal decree was rescinded 
five years later. 

The Roman Empire never recovered from the crisis. By the 
fourth century, all coins were weighed, and the economy was 
slipping back into barter again. By the seventh century, the weights 
themselves had been so frequently changed that it was no longer 
possible to effect an exchange in money at all. For all practical 
purposes, money became extinct, and the Roman Empire was no 


When new civilizations rose from the ruins of Rome, they 
reclaimed the lost discovery of money and used it to great 
advantage. The invention was truly a giant step forward for 
mankind, but there were many problems yet to be solved and 
much experimentation lay ahead. The development of paper 
money was a case in point. When a man accumulated more coins 
than he required for daily purchases, he needed a safe place to store 
them The goldsmiths, who handled large amounts of precious 
metals in their trades, had already built sturdy vaults to protect 
their own inventory, so it was natural for them to offer vault space 

0 their customers for a fee. The goldsmith could be trusted to 
guard the coins well because he also would be guarding his own 

When the coins were placed into the vault, the warehouseman 
would give the owner a written receipt which entitled him to 

1 As quoted by Groseclose, Money and Man, pp. 43-44. 


withdraw at any time. At first, the only way the coins could be 
taken from the vault was for the owner to personally present the 
receipt. Eventually, however, it became customary for the owner to 
merely endorse his receipt to a third party who, upon presentation, 
could make the withdrawal. These endorsed receipts were the 
forerunners of today's checks. 

The final stage in this development was the custom of issuing, 
not just one receipt for the entire deposit, but a series of smaller 
receipts, adding up to the same total, and each having printed 
across the top: pay to the bearer on demand. As the population 
learned from experience that these paper receipts were truly 
backed by good coin in the goldsmith's warehouse and that the 
coin really would be given out in exchange for the receipts, it 
became increasingly common to use the paper instead of the coin. 

Thus, receipt money came into existence. The paper itself was 
useless, but what it represented was quite valuable. As long as the 
coin was held in safe keeping as promised, there was no difference 
in value between the receipt and the coin which backed it. And, as 
we shall see in the next chapter, there were notable examples of the 
honest use of receipt money at the very beginning of the develop- 
ment of banking. When the receipt was scrupulously honored, the 
economy moved forward. When it was used as a gimmick for the 
artificial expansion of the money supply, the economy convulsed 
and stagnated. 


This is not a textbook on the history of money, so we cannot 
afford the luxury of lingering among the fascinating details. For our 
purposes, it is sufficient to recognize that human behavior in these 
matters is predictable and, because of that predictability, it is 
possible to formulate another principle that is so universal that it 
too, may be considered a natural law. Drawing from the vast 
experience of this early period, it can be stated as follows: 

LESSON: Whenever government sets out to manipulate the 
money supply, regardless of the intelligence or good intentions 
of those who attempt to direct the process, the result is inflation, 
economic chaos, and political upheaval. By contrast, whenever 
government is limited in its monetary power to only the 
maintenance of honest weights and measures of precious 



metals, the result is price stability, economic prosperity, and 
political tranquility. Therefore, 

LAW: For a nation to enjoy economic prosperity and 
political tranquility, the monetary power of its politicians must 
be limited solely to the maintenance of honest weights and 
measures of precious metals. 

As we shall see in the following chapters, the centuries of 
monetary upheaval that followed that early period contain no 
evidence that this law has been repealed by modern man. 


Knowledge of the nature of money is essential to an under- 
standing of the Federal Reserve. Contrary to common belief, the 
topic is neither mysterious nor complicated. For the purposes of 
this study, money is defined as anything which is accepted as a 
medium of exchange. Building on that, we find there are four kinds 
of money: commodity, receipt, fiat, and fractional. Precious metals 
were the first commodity money to appear in history and ever 
since have been proven by actual experience to be the only reliable 
base for an honest monetary system. Gold, as the basis of money, 
can take several forms: bullion, coins, and fully backed paper 
receipts. Man has been plagued throughout history with the false 
theory that the quantity of money is important, specifically that 
more money is better than less. This has led to perpetual manipula- 
tion and expansion of the money supply through such practices as 
coin clipping, debasement of the coin content, and, in later centu- 
ries, the issuance of more paper receipts than there was gold to 
back them. In every case, these practices have led to economic and 
political disaster. In those rare instances where man has refrained 
from manipulating the money supply and has allowed it to be 
determined by free-market production of the gold supply, the 
result has been prosperity and tranquility. 

Chapter Eight 


The history of paper money without precious- 
metal backing forced on the public by government 
decree; the emergence of our present-day 
fractional-reserve banking system based on the 
issuance of a greater amoun t of receipts for gold 
than the bank has in gold to back them up. 

We previously have broken down the concept of money into 
four categories: commodity, receipt, fiat, and fractional. In the last 
chapter we examined commodity and receipt money in some 
detail. In doing so, we also established certain monetary principles 
which apply regardless of their form. We shall now turn to the 
remaining two categories, both of which are represented by paper 
and which are at the root of almost all of modern man's economic 


The American Heritage Dictionary defines fiat money as "paper 
money decreed legal tender, not backed by gold or silver." The two 
characteristics of fiat money, therefore, are (1) it does not represent 
anything of intrinsic value and (2) it is decreed legal tender. Legal 
tender simply means that there is a law requiring everyone to 
accept the currency in commerce. The two always go together 
because, since the money really is worthless, it soon would be 
rejected by the public in favor of a more reliable medium of 
exchange, such as gold or silver coin. Thus, when governments 
issue fiat money, they always declare it to be legal tender under 
pain of fine or imprisonment. The only way a government can 
exchange its worthless paper money for tangible goods and 
services is to give its citizens no choice. 

The first notable use of this practice was recorded by Marco 
Polo during his travels to China in the thirteenth century. The 
famous explorer gives us this account: 



The Emperor's mint then is in this same City of Cambaluc, and the 
way it is wrought is such that you might say he hath the Secret of 
Alchemy in perfection, and you would be right!... 

What they take is a certain fine white bast or skin which lies 
between the wood of the tree and the thick outer bark, and this they 
make into something resembling sheets of paper, but black. When 
these sheets have been prepared they are cut up into pieces of different 
sizes. The smallest of these sizes is worth a half tornesel.... There is 
also a kind worth one Bezant of gold, and others of three Bezants, and 
so up to ten. 

All these pieces of paper are issued with as much solemnity and 
authority as if they were of pure gold or silver; and on every piece, a 
variety of officials, whose duty it is, have to write their names and to 
put their seals. And when all is prepared duly, the chief officer 
deputed by the Kaan smears the Seal entrusted to him with vermilion 
and impresses it on the paper, so that the form of the Seal remains 
stamped upon it in red; the money is then authentic. Any one forging 
it would be punished with death. And the Kaan causes every year to 
be made such a vast quantity of this money, which costs him nothing, 
that it must equal in amount all the treasures in the world. 

With these pieces of paper, made as I have described, he causes all 
payments on his own account to be made, and he makes them to pass 
current universally over all his Kingdoms.... And nobody, however 
important he may think himself, dares to refuse them on pain of death 
And indeed everybody takes them readily. 

One is tempted to marvel at the Kaan's audacious power and 
the subservience of his subjects who endured such an outrage; but 
our smugness rapidly vanishes when we consider the similarity to 
our own Federal Reserve Notes. They are adorned with signatures 
and seals; counterfeiters are severely punished; the government 
pays its expenses with them; the population is forced to accept 
them; they— and the "invisible" checkbook money into which they 
can be converted — are made in such vast quantity that it must 
equal in amount all the treasures of the world. And yet they cost 
nothing to make. In truth, our present monetary system is an 
almost exact replica of that which supported the warlords of seven 
centuries ago. 

1- Original from Henry Thule's edition of Marco Polo's Travels, reprinted in W- 
Vissering, On Chinese Currency: Coin and Paper Money (Leiden: E.J. Brill, 1877), 
reprinted 1968 by Cheng-wen Publishing Co., Taiwan, as cited by Anthony Sutton, 
The War on Cold (Seal Beach, California: '76 Press, 1977), pp. 26-28. 




Unfortunately, the present situation is not unique to our 
history. In fact, after China, the next place in the world to adopt the 
use of fiat money was America; specifically, the Massachusetts Bay 
Colony. This event has been described as "not only the origin of 
paper money in America, but also in the British Empire, and almost 
in the Christian world." 1 

In 1690, Massachusetts launched a military raid against the 
French colony in Quebec. She had done this before and, each time, 
had brought back sufficient plunder to more than pay for the 
expedition. This time, however, the foray was a dismal failure, and 
the men returned empty handed. When the soldiers demanded 
their pay, Massachusetts found its coffers empty. Disgruntled 
soldiers have a way of becoming unruly, so the officials scrambled 
for some way to raise the funds. Additional taxes would have been 
extremely unpopular, so they decided simply to print paper 
money. In order to convince the soldiers and the citizenry to accept 
it, the government made two solemn promises: (1) it would redeem 
the paper for gold or silver coin just as soon as there was sufficient 
tax revenue to do so, and (2) absolutely no additional paper notes 
would ever be issued. Both pledges were promptly broken. Only a 
few months later, it was announced that the original issue was 
insufficient to discharge the government's debt, and a new issue 
almost six times greater was put into circulation. The currency 
wasn't redeemed for nearly forty years, long after those who had 
made the pledge had faded from the scene. 


Most of the other colonies were quick to learn the magic of the 
printing press, and the history that followed is a classic example of 
cause and effect: Governments artificially expanded the money 
supply through the issuance of fiat currency. This was followed by 
legal tender laws to force its acceptance. Next came the disappear- 
ance of gold or silver coins which went, instead, into private hoards 
or to foreign traders who insisted on the real thing for their wares. 
Many of the colonies repudiated their previous money by issuing 
new bills valued at multiples of the old. Then came political 

1- Ernest Ludlow Bogart, Economic History of the American People (New York: 
Longmans, Green and Co., 1930), p. 172. 



discontent and civil disobedience. And at the end of each cycle 
there was rampant inflation and economic chaos. 

In 1703, South Carolina declared that its money was "a good 
payment and tender in law" and then added that, should anyone 
refuse to honor it as such, they would be fined an amount equal to 
"double the value of the bills so refused." By 1716, the penalty had 
been increased to "treble the value." 

Benjamin Franklin was an ardent proponent of fiat money 
during those years and used his great influence to sell the idea to 
the public. We can get some idea of the ferment of the times by 
noting that, in 1736, writing in his Pennsylvania Gazette, Franklin 
apologized for its irregular publication, and explained that the 
printer was "with the Press, labouring for the publick Good, to 
make Money more plentiful." 2 The printing of money was appar- 
ently a major, time-consuming operation. 

In 1737, Massachusetts devalued its fiat currency by 66%, 
offering one dollar of new currency for three of the old. The 
promise was made that, after five years, the new money would be 
fully redeemed in silver or gold. The promise was not kept. 

By the late 1750s, Connecticut had price inflated by 800%. The 
Carolinas had inflated 900%. Massachusetts 1000%. Rhode Island 
2300% 4 Naturally, these inflations all had to come to an end and, 
when they did, they turned into equally massive deflations and 
depressions. It has been shown that, even in colonial times, the 
classic booms and busts which modern economists are fond of 
blaming on an "unbridled free market" actually were direct 
manifestations of the expansion and contraction of fiat mone | 
which no longer was governed by the laws of supply and demand. 

1 Statutes at Large of South Carolina, II. 211,665, as cited by George Bancroft, A 
Plea for the Constitution (Originally published by Harpers in 1886. Reprinted in 
Sewanee, Tennessee: Spencer Judd Publishers, 1982), p. 7. 

2. Leonard W. Labaree, ed., The Papers of Benjamin Franklin (New Haven: Yale 
University Press, 1960), Vol. 2, p. 159. 

3. Province Laws, II. 826, cited by Bancroft, p. 14. 

4. Ron Paul and Lewis Lehrman, The Case for Gold (Washington, D.C.: Cato Insti- 
tute, 1982), p. 22. Also Sutton, The War on Gold, p. 44. 

5 See Donald L. Kemmerer, "Paper Money in New Jersey, 1668-1775/ New 
Jersey Historical Society, Proceedings 74 (April 1956): pp. 107-144, as cited by Paul 
and Lehrman, The Case for Gold, p. 22. 



By this time, coins had completely disappeared from the scene. 
Some were in private hoards, but most of them had been exported 
to other countries, leaving the colonies with little choice but to use 
fiat money or barter. Merchants from abroad were interested in 
neither of those, however, and international trade ground almost to 
a halt. 


The experiment with fiat money was a calamity to the colonists, 
but it was also a thorn in the side of the Bank of England. The bank 
had used its influence with the Crown to forbid the colonies to mint 
their own coins or to establish local banks. This meant that, if the 
colonists wanted the convenience of paper money, they would be 
forced to use the notes issued by the Bank of England. No one had 
anticipated that the colonial governments would be so inventive as 
to create their own paper money. So, in 1751, Great Britain began to 
pressure the colonies to redeem all of their currency and withdraw 
it from circulation. This they eventually did, and at bargain prices. 
By then, their fiat money was heavily discounted in the market 
place and the governments were able to buy back their own 
currency for pennies on the dollar. 

The decree from the British Parliament, although heavily 
resented by the colonists, turned out to be a blessing in disguise. 
The paper notes of the Bank of England never did become a 
primary medium of exchange. Probably because of their recent bad 
experience with paper money, the colonists merely brought what 
few gold and silver coins they had out of hiding and returned to a 
true commodity-money system. At first, the doomsdayers pre- 
dicted this would spell further ruin for the colonial economy. 
"There isn't enough money" was the all-too-familiar cry. But there 
was, indeed, quite enough for, as we have already seen, any 
amount is sufficient. 


There was, in fact, a period in which other commodities became 
accepted as a secondary medium of exchange. Such items as nails, 
lumber, rice, and whisky filled the monetary void, but tobacco was 
the most common. Here was a commodity which was in great 
demand both within the colonies and for overseas commerce. It 
had intrinsic value; it could not be counterfeited; it could be 
divided into almost any denominational quantity; and its supply 



could not be increased except by the exertion of labor. In other 
words, it was regulated by the law of supply and demand, which 
gave it great stability in value. In many ways, it was an ideal 
money. It was officially adopted as such by Virginia in 1642 and a 
few years later by Maryland, but it was used unofficially in all the 
other colonies, as well. So close was the identity of tobacco with 
money that the previous fiat currency of New Jersey, not a tobacco 
growing state, displayed a picture of a tobacco leaf on its face. It 
also carried the inscription: "To counterfeit is Death. " Tobacco was 
used in early America as a secondary medium of exchange for 
about two-hundred years, until the new Constitution declared that 
money was, henceforth, the sole prerogative of the federal govern- 

The primary currency at that juncture, however, was still gold 
and silver coin, or specie, as it is called. And the immediate result of 
returning to a sound monetary unit was a rapid recovery from the 
economic stagnation previously inflicted by the booms and busts of 
fiat money. Trade and production rose dramatically, and this, in 
turn, attracted an inflow of gold and silver coin from around the 
world, filling the void that had been created by years of worthless 
paper. The law of supply and demand was visibly at work. For a 
while, Massachusetts had returned to specie while Rhode Island 
remained on fiat money. The result was that Newport, which had 
been the trade center for the West Indies, lost its trade to Boston 
and became an empty port. 2 After the colonies had returned to 
coin, prices quickly found their natural equilibrium and then stayed 
at that point, even during the Seven Years War and the disruption 
of trade that occurred immediately prior to the Revolution. There 
is no better example of the fact that economic systems in distress 
can and do recover rapidly if government does not interfere with 
the natural healing process. 


The War for Independence brought all of this to a sudden halt. 
Wars are seldom funded out of the existing treasury, nor are they 
even done so out of increased taxes. If governments were to levy 

1. Galbraith, pp. 48-50. 

2. Paul and Lehrman, pp. 22-23. 

3. "The Colonial Monetary Standard of Massachusetts/ 1 by Roger W. Weiss, 
Economic History Review, No. 27, November, 1974, p. 589. 



taxes on their citizens fully adequate to finance the conflict, the 
amount would be so great that many of even its most ardent 
supporters would lose enthusiasm. By artificially increasing the 
money supply, however, the real cost is hidden from view. It is still 
paid, of course, but through inflation, a process that few people 

The American Revolution was no exception. In order to pay the 
bill for independence, both the Confederation and the individual 
states went heavily into the printing business. At the beginning of 
the war in 1775, the total money supply stood at $12 million. In 
June of that year, the Continental Congress issued another 
$2 million. Before the notes were even put into circulation, another 
$1 million was authorized. By the end of the year, another 
$3 million. In 1776, another $19 million. $13 million in 1777. 
$64 million in 1778. $125 million in 1779. And still more: the 
Continental Army issued its own "certificates" for the purchase of 
supplies totalling $200 million. A total of $425 million in five years 
on top of a base of $12 million is an increase of over 3500%. And, in 
addition to this massive expansion of the money supply on the part 
of the central government, it must be remembered that the states 
were doing exactly the same thing. It is estimated that, in just five 
years from 1775 to the end of 1779, the total money supply 
expanded by 5000%. By contrast, the amount raised in taxes over 
the five-year period was inconsequential, amounting to only a few 
million dollars. 


The first exhilarating effect of this flood of new money was the 
flush of apparent prosperity, but that was quickly followed by 
inflation as the self-destruct mechanism began to operate. In 1775, 
paper Continentals were traded for one dollar in gold. In 1777, they 
were exchanged for twenty-five cents. By 1779, just four years from 
their issue, they were worth less than a penny. The phrase "Not 
worth a Continental" has its origin in this dismal period. Shoes sold 
for $5,000 a pair. A suit of clothes cost a million. 

It was in that year that George Washington wrote, "A wagon 
load of money will scarcely purchase a wagon load c#provisions." 

t- Quoted by Albert S. Bolles, The Financial History of the United States (New York: 
D. Appleton, 1896,4th ed.), Vol. I, p. 132. 


Even Benjamin Franklin began to see the light. In a mood of 
sarcasm, he wrote: 

This Currency, as we manage it, is a wonderful machine. It 
performs its Office when we issue it; it pays and clothes Troops and 
provides Victuals and Ammunition; and when we are obliged to issue 
a Quantity excessive, it pays itself off by Depreciation. 

When speaking of deficit spending, it is common to hear the 
complaint that we are saddling future generations with the bill for 
what we enjoy today. Why not let those in the future help pay for 
what will benefit them also? Don't be deceived. That is a miscon- 
ception encouraged by politicians to calm the public. When money 
is fiat, as the colonists discovered, every government building, 
public work, and cannon of war is paid out of current labor and 
current wealth. These things must be built today with today's labor, 
and the man who performs that labor must also be paid today. It is 
true that interest payments fall partly to future generations, but the 
initial cost is paid by those in the present. It is paid by loss of value 
in the monetary unit and loss of purchasing power for one's wages. 


Fiat money is the means by which governments obtain instant 
purchasing power without taxation. But where does that purchas- 
ing power come from? Since fiat money has nothing of tangible 
value to offset it, government's fiat purchasing power can be 
obtained only by subtracting it from somewhere else. It is, in fact, 
"collected" from us all through a decline in our purchasing power. 
It is, therefore, exactly the same as a tax, but one that is hidden from 
view, silent in operation, and little understood by the taxpayer. 

In 1786, Thomas Jefferson provided a clear explanation of this 
process when he wrote: 

Every one, through whose hands a bill passed, lost on that bill 
what it lost in value during the time it was in his hands. This was a real 
tax on him; and in this way the people of the United States actually 
contributed those... millions of dollars during the war, and by a mode 
of taxation the most oppressive of all because the most unequal of all- 

1. Letter to Samuel Cooper, April 22,1779, quoted by Albert Henry Smyth, ed., The 
Writings ofBenjamin Franklin, (New York: Macmillan, 1906), Vol. VII, p. 294. 

2. Thomas Jefferson, Observations on the Article Etats-Unis Prepared for the 
Encyclopedia, June 22, 1786, from Writings (New York: G.P. Putnam's Sons, 1894), 
Vol. IV, p. 165. 




As prices skyrocketed, the colonies enacted wage and price 
controls, which was like plugging up the whistle on a tea kettle in 
hopes of keeping the steam from escaping. When that failed, there 
followed a series of harsh legal tender laws. One law even invoked 
the specter of treason. It said: "If any person shall hereafter be so 
lost to all virtue and regard for his Country as to refuse to receive 
said bills in payment-he shall be deemed, published, and treated 
as an enemy in this Country and precluded from all trade or 
intercourse with the inhabitants of these colonies." 1 

Rhode Island not only levied a heavy fine for non-acceptance of 
its notes but, upon a second offense, an individual was stripped of 
citizenship. When a court declared the act unconstitutional, the 
legislature called the judges before it and summarily dismissed the 
offenders from office. 


If the ravages of war were a harsh burden for the colonies to 
bear, the havoc of fiat money was equally so. After the war, 
inflation was followed by deflation as reality returned to the 
market place. Prices fell drastically, which was wonderful for those 
who were buying. But, for the merchants who were selling or the 
farmers who had borrowed heavily to acquire property at inflated 
wartime prices, it was a disaster. The new, lower prices were not 
adequate to sustain their fixed, inflated mortgages, and many 
hard-working families were ruined by foreclosure. Furthermore, 
most people still did not understand the inflation process, and 
there were many who continued to advocate the "paper money 
cure." Several of the states were receptive to the pressure, and their 
printing presses continued to roll. 

Historian Andrew McLaughlin recalls a typical scene in Rhode 
Island at that time as witnessed by a visiting Frenchman: 

A French traveler who passed through Newport about this time 
gives a dismal picture of the place: idle men standing with folded arms 
at the corners of the streets; houses falling to ruins; miserable shops 
offering for sale nothing but a few coarse stuffs;.. .grass growing in the 
streets; windows stuffed with rags; everywhere announcing misery, 

V .David Ramsay, History of the American Revolution (London: Johnson and Stock- 
dale, 1791), Vol. II, pp. 134-36. 

2 - Merrill Jensen, The New Nation (New York: Vintage Books, 1950), p. 324. 



the triumph of paper money and the influence of bad government The 
merchants had closed their stores rather than take payment in paper; 
farmers from neighboring states did not care to bring their produce. 

Idleness and economic depression also led to outbursts of 
rebellion and insurrection. In 1786, George Washington wrote to 
James Warren: "The wheels of government are clogged ancU.. we 
are descending into the vale of confusion and darkness." Two 
years later, in a letter to Henry Knox, he said: "If . . . any person had 
told me that there would have been such formidable rebellion as 
exists, I would have thought him a bedlamite, a fit subject for a 

Fortunately, there is a happy ending to that part of the story. As 
we shall see in a subsequent chapter, when the state delegates 
assembled to draft the Constitution, the effects of fiat money were 
so fresh in their minds they decided to put an end to it once and for 
all. Then, the new republic not only rapidly recovered but went on 
to become the economic envy of the world— for a while, at 
least— until the lesson had been forgotten by following generations. 
But that is getting ahead of our story. For now, we are dealing with 
the topic of fiat money; and the experience of the American 
colonies is a classic example of what always happens when men 
succumb to its siren call. 

Let us pause at this point and observe another of those lessons 
derived from centuries of experience. That lesson is so clear and so 
universal and so widely seen throughout history that it may be 
stated as a natural law of human behavior: 

LESSON: Fiat money is paper money without 
precious-metal backing and which people are required by law 
to accept. It allows politicians to increase spending without 
raising taxes. Fiat money is the cause of inflation, and the 
amount which people lose in purchasing power is exactly the 
amount which was taken from them and transferred to their 
government by this process. Inflation, therefore, is a hidden tax. 

1. Andrew C. McLaughlin, The Confederation arid the Constitution (New York: 
Collier Books, 1962),d P . 107-Q8. . , . , , 

2. Harry Atwood, The Constitution Explained (Merrimac, Massachusetts: Destiny 
Publishers, 1927; 2nd ed. 1962), p. 3. 

3. Ibid., p. 4. 



This tax is the most unfair of all because it falls most heavily on 
those who are least able to pay: the small wage earner and those 
on fixed incomes. It also punishes the thrifty by eroding the 
value of their savings. This creates resentment among the 
people, leading always to political unrest and national disunity. 

LAW: A nation that resorts to the use of fiat money has 
doomed itself to economic hardship and political disunity. 


Let us turn, now, to the fourth and final possible form of 
money: a most intriguing concept called fractional money. And, to 
understand how this functions, we must return to Europe and the 
practice of the early goldsmiths who stored the precious metal 
coins of their customers for a fee. 

In addition to the goldsmiths who stored coins, there was 
another class of merchants, called "scriveners," who loaned coins. 
The goldsmiths reasoned that they, too, could act as scriveners, but 
do so with other people's money. They said it was a pity for all that 
coin to just sit idle in their vaults. Why not lend it out and earn a 
profit which then could be split between themselves and their 
depositors? Put it to work, instead of merely gathering dust. They 
had learned from experience that very few of their depositors ever 
wanted to remove their coins at the same time. In fact, net 
withdrawals seldom exceeded ten or fifteen per cent of their 
stockpile. It seemed perfectly safe to lend up to eighty or even 
eighty-five per cent of their coins. And so the warehousemen began 
to act as loan brokers on behalf of their depositors, and the concept 
of banking, as we know it today, was born. 

That's the way many history books describe it, but there is more 
involved here than merely putting idle money to work. First of all, 
sharing the interest income with the owners of the deposits was not 
part of the original concept. That only became general practice 
many years later after the depositors became outraged and needed 
to be reassured that these loans were in their interest as well. In the 
beginning, they didn't even know that their coins were being 
loaned out. They naively thought that the goldsmiths were lending 
their own money. 



In the second place, we need to consider whether the coin in the 
vault was even available for lending — regardless of whether or not 
the depositors received a part of the profit. Let us suppose that we 
are playing a game of poker at the home of Charlie Smith. Each of 
us has given $20 to Charlie who, acting as the banker, has put our 
money into a shoe box and given us, in return, twenty poker chips. 
It is the understanding that, anytime we want to go home, we can 
get back a dollar for each chip we have at that time. Now let us 
suppose that Charlie's brother-in-law, Larry, shows up, not to play 
poker, but to borrow some money. Since six of us are playing and 
each has put in $20, there is a total of $120 in the shoe box, and that 
turns out to be perfect for Larry's needs. You can imagine what 
would happen if Charlie decided to lend out the "idle" money. It is 
not available for lending. 

Neither Charlie nor any of the players have the right to loan 
those dollars, because they are being held in escrow, so to speak, 
pending completion of the contract between Charlie and his guests. 
Those dollars no longer even exist as money. They have been 
replaced — in concept at least— by the poker chips. If any of us are 
so touched by Larry's story that we decide to loan him the money 
ourselves, we would have to do it with other dollars or cash in our 
chips for the dollars in the shoe box. In that case, of course, we 
could no longer stay in the game. We cannot spend, loan, or give away 
the deposit and also consider the chips to be worth anything. 

If you are a member of an organization and have given your 
proxy to a friend to vote in your absence at the annual meeting, you 
cannot then show up and cast your own vote in addition to your 
proxy. Likewise, in the beginning of banking, the certificates which 
were circulated as money were, in effect, proxies for the coins. 
Consequently, those coins were not available for lending. Their 
monetary value had been assigned to the certificates. If the certifi- 
cate holders had wanted to lend out their coins, they should have 
retired the certificates first. They were not entitled to hold spend- 
able paper money and also authorize their banker to lend that same 
money as coins. One cannot spend, loan, or give away the coins and also 
consider the certificates to be worth anything. 

All of this is just common sense. But there is another dimension 
to the problem which has to do with honesty in business contracts. 



When the bankers used those coins as the basis for loans, they were 
putting themselves in a position of not having enough coin in the 
vault to make good on their contracts when it came time for 
depositors to take their money home. In other words, the new 
contracts were made with the full knowledge that, under certain 
circumstances, they would have to be broken. But the bankers 
never bothered to explain that. The general public was led to 
believe that, if they approved of putting these supposedly idle 
funds to work, they would be helping the economy and earning a 
little profit besides. It was an appealing proposal, and the idea 
caught on like wildfire. 


Most borrowers wanted paper money, of course, not bulky 
coins, so, when they received their loans, they usually put the coins 
right back into the vault for safekeeping. They were then given 
receipts for these deposits which, as we have observed, were readily 
accepted in commerce as money. At this point, things began to get 
complicated. The original depositors had been given receipts for all 
of the bank's coins. But the bank now issued loans in the amount of 
eighty-five per cent of its deposits, and the borrowers were given 
receipts for that same amount. These were in addition to the original 
receipts. That made 85% more receipts than coins. Thus, the banks 
created 85% more money and placed it into circulation through their 
borrowers. In other words, by issuing phony receipts, they artifi- 
cially expanded the money supply. At this point, the certificates 
were no longer 100% backed by gold. They now had a backing of 
only 54 % / but they were accepted by the unsuspecting public as 
equal in value to the old receipts. The gold behind all of them, 
however, now represented only a fraction of their face value. Thus, 
the receipts became what may be called fractional money, and the 
process by which they were created is called fractional-reserve 

None of this shortfall, unfortunately, was ever explained. The 
bankers decided that it would be better not to discuss reality where 
the public could hear. These facts became the arcane secrets of the 
profession. The depositors were never encouraged to question how 
the banks could lend out their money and still have it on hand to 

1- 100 units of gold divided by 185 certificates equals .54 


pay back on an instant's notice. Instead, bankers put on great airs of 
respectability, stability, and accountability; dressed and acted seri- 
ous if not stern; erected great edifices resembling government 
buildings and temples, all to bolster the false image of being able to 
honor their contracts to pay on demand. 

It was John Maynard Keynes who observed: 

A "sound" banker, alas! is not one who foresees danger, and 
avoids it, but one who, when he is ruined, is ruined in a conventional 
and orthodox way along with his fellows, so that no one can readi ly 
blame him. It is necessarily part of the business of a banker to maintain 
appearances, and to confess a conventional respectability, which is 
more than human Life-long practices of this kind make them the most 
romantic and the least realistic of men. 


Let us step back for a moment and analyze. In the beginning, 
banks served as warehouses for the safe keeping of their customers' 
coins. When they issued paper receipts for those coins, they 
converted commodity money into receipt money. This was a great 
convenience, but it did not alter the money supply. People had a 
choice of using either coin or paper but they could not use both. If 
they used coin, the receipt was never issued. If they used the 
receipt, the coin remained in the vault and did not circulate. 

When the banks abandoned this practice and began to issue 
receipts to borrowers, they became magicians. Some have said they 
created money out of nothing, but that is not quite true. What they 
did was even more amazing. They created money out of debt. 

Obviously, it is easier for people to go into debt than to mine 
gold. Consequently, money no longer was limited by the natural 
forces of supply and demand. From that point in history forward, it 
was to be limited only by the degree to which bankers have been 
able to push down the gold-reserve fraction of their deposits. 

From this perspective, we can now look back on fractional 
money and recognize that it really is a transitional form between 
receipt money and fiat money. It has some of the characteristics of 
both. As the fraction becomes smaller, the less it resembles receipt 
money and the more closely it comes to fiat money. When the 
fraction finally reaches zero, then it has made the complete 

1. As quoted by Lever and Huhne, Debt and Danger: The World Financial Crisis 
(New York: The Atlantic Monthly, 1986), p. 42. 



transition and becomes pure fiat. Furthermore, there is no example 
in history where men, once they had accepted the concept of 
fractional money, didn't reduce the fraction lower and lower until, 
eventually, it became zero. 

No bank can stay in business for very long with a zero reserve. 
The only way to make people accept such a worthless currency is 
by government force. That's what legal-tender laws are all about. 
The transition from fractional-reserve money to fiat money, there- 
fore, requires the participation of government through a mecha- 
nism which is called a central bank. Most of the balance of this book 
will be devoted to a study of that Creature, but, for now, suffice it 
to say that the euphoria of being able to create money without 
human effort is so great that, once such a narcotic is taken, there is 
no politician or banker who can kick the habit. As William Sumner 
observed: "A man might as well jump off a precipice intending to 
stop half way down.' 


And so, once again, we come to one of those natural laws that 
emerge from centuries of human experience. It can be stated as 

LESSON: Fractional money is paper money which is backed 
by precious metals up to only a portion of the face amount. It is 
a hybrid, being part receipt money and part fiat money. 
Generally, the public is unaware of this fact and believes that 
fractional money can be redeemed in full at any time. When the 
truth is discovered, as periodically happens, there are runs on 
the bank, and only the first few depositors in line can be paid. 
Since fractional money earns just as much interest for the 
bankers as does gold or silver, the temptation is great for them 
to create as much of it as possible. As this happens, the fraction 
which represents the reserve becomes smaller and smaller until, 
eventually, it is reduced to zero. Therefore, 

LAW: Fractional money will always degenerate into fiat 
money. It is but fiat money in transition. 

So much for the overview and generalities. In the next chapter 
we shall see what history has to say on this process. And what a 

history it is! 

18 William Graham Sumner, History of American Currency (New York: Holt, 



Fiat money is paper money without precious-metal backing 
which people are required by law to accept. The first recorded 
appearance of fiat money was in thirteenth century China, but its 
use on a major scale did not occur until colonial America. The 
experience was disastrous, leading to massive inflation, unemploy- 
ment, loss of property, and political unrest. During one period 
when the Bank of England forced the colonies to abandon theii fiat 
money, general prosperity quickly returned. The Revolutionary 
War brought fiat money back to the colonies with a vengeance. The 
economic chaos that resulted led the colonial governments to 
impose price controls and harsh legal tender laws, neither of which 
were effective. 

Fractional money is defined as paper money with precious- 
metal backing for part, not all, of its stated value. It was introduced 
in Europe when goldsmiths began to issue receipts for gold which 
they did not have, thus only a fraction of their receipts was 
redeemable. Fractional money always degenerates into pure fiat 

Chapter Nine 


The condensed history of fractional-reserve bank- 
ing; the unbroken record of fraud, booms, busts, 
and economic chaos; the formation of the Bank of 
England, the world's first central bank, which 
became the model for the Federal Reserve System. 

Banks of deposit first appeared in early Greece, concurrent with 
the development of coinage itself. They were known in India at the 
time of Alexander the Great. They also operated in Egypt as part of 
the public granary system. They appeared in Damascus in 1200 and 
in Barcelona in 1401. It was the city-state of Venice, however, which 
is considered the cradle of banking as we know it today. 


By the year 1361, there already had been sufficient abuse in 
banking that the Venetian Senate passed a law forbidding bankers 
to engage in any other commercial pursuit, thus removing the 
temptation to use their depositors' funds to finance their own 
enterprises. They were also required to open their books for public 
inspection and to keep their stockpile of coins available for viewing 
at all reasonable times. In 1524, a board of bank examiners was 
created and, two years later, all bankers were required to settle 
accounts between themselves in coin rather than by check. 

In spite of these precautions, however, the largest bank at that 
time, the house of Pisano and Tiepolo, had been active in lending 
against its reserves and, in 1584, was forced to close its doors 
because of inability to refund depositors. The government picked 
up the pieces at that point and a state bank was established, the 
Banco della Piazza del Rialto. Having learned from the recent 
experience with bankruptcy, the new bank was not allowed to 
make any loans. There could be no profit from the issuance of 
credit. The bank was required to sustain itself solely from fees for 
coin storage, exchanging currencies, handling the transfer of pay- 
ments between customers, and notary services. 


The formula for honest banking had been found. The bank 
prospered and soon became the center of Venetian commerce. Its 
paper receipts were widely accepted far beyond the country's 
borders and, in fact, instead of being discounted in exchange for 
gold coin as was the usual practice, they actually carried a premium 
over coins. This was because there were so many kinds of coin in 
circulation and such a wide variance of quality within the same 
type of coin that one had to be an expert to evaluate their worth. 
The bank performed this service automatically when it took the 
coins into its vault. Each was evaluated, and the receipt given for it 
was an accurate reflection of its intrinsic worth. The public, 
therefore, was far more certain of the value of the paper receipts 
than of many of the coins and, consequently, was willing to 
exchange a little bit more for them. 

Unfortunately, with the passage of time and the fading from 
memory of previous banking abuses, the Venetian Senate eventu- 
ally succumbed to the temptation of credit. Strapped for funds and 
not willing to face the voters with a tax increase, the politicians 
decided they would authorize a new bank without restrictions 
against loans, have the bank create the money they needed, and 
then "borrow" it. So, in 1619, the Banco del Giro was formed, which, 
like its bankrupt predecessor, began immediately to create money 
out of nothing for the purpose of lending it to the government. 
Eighteen years later, the Banco della Piazza del Rialto was absorbed 
into the new bank, and history's first tiny flame of sound banking 
sputtered and died. 

Throughout the fifteenth and sixteenth centuries, banks had 
been springing up all over Europe. Almost without exception, 
however, they followed the lucrative practice of lending money 
which was not truly available for loan. They created excess 
obligations against their reserves and, as a result, every one of them 
failed. That is not to say that their owners and directors did not 
prosper. It merely means that their depositors lost all or a part of 
their assets entrusted for safekeeping. 


It wasn't until the Bank of Amsterdam was founded in 1609 that 
we find a second example of sound banking practices, and the 
results were virtually the same as previously experienced by the 
Banco della Piazza del Rialto. The bank only accepted deposits and 



steadfastly refused to make loans. Its income was derived solely 
from service fees. All payments in and around Amsterdam soon 
came to be made in paper currency issued by the bank and, in fact, 
that currency carried a premium over coin itself. The burgomasters 
and the city council were required to take an annual oath swearing 
that the coin reserve of the bank was intact. Galbraith reminds us: 

For a century after its founding it functioned usefully and with 
notably strict rectitude. Deposits were deposits, and initially the metal 
remained in storage for the man who owned it until he transferred it to 
another. None was loaned out. In 1672, when the armies of Louis XIV 
approached Amsterdam, there was grave alarm. Merchants besieged 
the bank, some in the suspicion that their wealth might not be there. 
All who sought their money were paid, and when they found this to be 
so, they did not want payment. As was often to be observed in the 
future, however desperately people want their money from a bank, 
when they are assured they can get it, they no longer want it. 1 

The principles of honesty and restraint were not to be long 
lived, however. The temptation of easy profit from money creation 
was simply too great. As early as 1657, individuals had been 
permitted to overdraw their accounts which means, of course, that 
the bank created new money out of their debt. In later years 
enormous loans were made to the Dutch East Indies Company. The 
truth finally became known to the public in January of 1790, and 
demands for a return of deposits were steady from that date 
forward. Ten months later, the bank was declared insolvent and 
was taken over by the City of Amsterdam. 


The third and last experience with honest banking occurred in 
Germany with the Bank of Hamburg. For over two centuries it 
faithfully adhered to the principle of safe deposit. So scrupulous 
was its administration that, when Napoleon took possession of the 
bank in 1813, he found 7,506,956 marks in silver held against 
liabilities of 7,489,343. That was 17,613 more than was actually 
needed. Most of the bank's treasure that Napoleon hauled away 
was restored a few years later by the French government in the 
form of securities. It is not clear if the securities were of much value 
but, even if they were, they were not the same as silver. Because of 
foreign invasion, the bank's currency was no longer fully convert- 

1. Galbraith, p. 16. 


ible into coin as receipt money. It was now fractional money, and 
the self-destruct mechanism had been set in motion. The bank 
lasted another fifty-five years until 1871 when it was ordered to 
liquidate all of its accounts. 

That is the end of the short story of honest banking. From that 
point forward, fractional-reserve banking became the universal 
practice. But there were to be many interesting twists and turns in 
its development before it would be ready for something as sophisti- 
cated as the Federal Reserve System. 


In England, the first paper money was the exchequer order of 
Charles II. It was pure fiat and, although it was decreed legal 
tender, it was not widely used. It was replaced in 1696 by the 
exchequer bill. The bill was redeemable in gold, and the govern- 
ment went to great lengths to make sure that there was enough 
actual coin or bullion to make good on the pledge. In other words, 
it was true receipt money, and it became widely accepted as the 
medium of exchange. Furthermore, the bills were considered as 
short-term loans to the government and actually paid interest to the 

In 1707, the recently created Bank of England was given tlie 
responsibility of managing this currency, but the bank found more 
profit in the circulation of its own banknotes, which were in the 
form of fractional money and which provided for the collection of 
interest, not the payment of it. Consequently, the government bills 
gradually passed out of use and were replaced by banknotes 
which, by the middle of the eighteenth century, became England's 
only paper money. 

It must be understood that, at this time, the Bank of England 
was not yet fully developed as a central bank. It had been given a 
monopoly over the issue of banknotes within London and other 
prime geographic areas, but they were not yet decreed as legal 
tender. No one was forced to use them. They were merely private 
fractional receipts for gold coin issued by a private bank which the 
public could accept, reject, or discount at its pleasure. Legal tender 
status was not conferred upon the bank's money until 1833. 

Meanwhile, Parliament had granted charters to numerous other 
banks throughout the empire and, without exception, the issuance 
of fractional money led to their ultimate demise and the ruin of 



their depositors. "Disaster after disaster had to come upon the 
country," says Shaw, because "of the indifference of the state to 
these mere private paper tokens." 1 The Bank of England, however, 
was favored by the government above all others and, time after 
time, it was saved from insolvency by Parliament. How it came to 
be that way is an interesting story. 


England was financially exhausted after half a century of war 
against France and numerous civil wars fought largely over 
excessive taxation. By the time of the War of the League of 
Augsberg in 1693, King William was in serious need for new 
revenue. Twenty years previously, King Charles II had flat out 
repudiated a debt of over a million pounds which had been lent to 
him by scores of goldsmiths, with the result that ten-thousand 
depositors lost their savings. This was still fresh in everyone's 
memory, and, needless to say, the government was no longer 
considered a good investment risk. Unable to increase taxes and 
unable to borrow, Parliament became desperate for some other 
way to obtain the money. The objective, says Groseclose, was not to 
bring "the money mechanism under more intelligent control, but to 
provide means outside the onerous sources of taxes and public 
loans for the financial requirements of an impecunious govern- 

There were two groups of men who saw a unique opportunity 
arise out of this necessity. The first group consisted of the political 
scientists within the government. The second was comprised of the 
monetary scientists from the emerging business of banking. The 
organizer and spokesman of this group was William Paterson from 
Scotland. Paterson had been to America and came back with a 
grandiose scheme to obtain a British charter for a commercial 
company to colonize the Isthmus of Panama, then known as 
Darien. The government was not interested in that, so Paterson 
turned his attention to a scheme that did interest it very much, the 
creation of money. 

The two groups came together and formed an alliance. No, that 
is too soft a word. The American Heritage Dictionary defines a cabal 

b W.A. Shaw, Theory and Principles of Central Banking (London & New York- Sir I 
1 itman & Sons, Ltd., 1930), pp. 32-32. 
2- Groseclose, Money and Man, p. 175. 


as "A conspiratorial group of plotters or intriguers." There is no 
other word that could so accurately describe this group. With much 
of the same secrecy and mystery that surrounded the meeting on 
Jekyll Island, the Cabal met in Mercer's Chapel in London and 
hammered out a seven-point plan which would serve their mutual 

1. The government would grant a charter to the monetary scientists 

to form a bank; 

2. The bank would be given a monopoly to issue banknotes which 

would circulate as England's paper currency; 

3. The bank would create money out of nothing with only a fraction 

of its total currency backed by coin; 

4. The monetary scientists then would loan the government all the 

money it needed; 

5. The money created for government loans would be backed 

primarily by government I.O.U.s; 

6. Although this money was to be created out of nothing and would 

cost nothing to create, the government would pay "interest" on 
it at the rate of 8%; 

7. Government I.O.U.s would also be considered as "reserves" for 

creating additional loan money for private commerce. These 
loans also would earn interest. Thus, the monetary scientists 
would collect double interest on the same nothing. 1 
The circular which was distributed to attract subscribers to the 
Bank's initial stock offering explained: "The Bank hath benefit of 
interest on all the moneys which it, the Bank, creates out of 
nothing." 2 The charter was issued in 1694, and a strange creature 
took its initial breath of life. It was the world's first central bank. 
Rothbard writes: 

1. For an overview of these agreements, see Murray Rothbard, The Mystery of 
Banking (New York: Richardson & Snyder, 1983), p. 180. Also Martin Mayer, The 
Bankers (New York: Weybright & Talley, 1974), pp. 24-25. 

2. Quoted by Caroll Quigley, Tragedy and Hope: A History of the World in Our Time 
(New York: Macmillan, 1966), p. 49. Paterson did not benefit from his own creation- 
He withdrew from the Bank over a policy disagreement within a few months after 
its formation and then returned to Scotland where he succeeded in selling his 
Darien scheme. Frugal Scots thronged to buy stock and to book passage to the 
fever-ridden land. The stock became worthless and almost all the 1200 colonists lost 
their lives. 



In short, since there were not enough private savers willing to 
finance the deficit, Paterson and his group were graciously willing to 
buy government bonds, provided they could do so with 
newly-created out-of-thin-air bank notes carrying a raft of special 
privileges with them. This was a splendid deal for Paterson and 
company, and the government benefited from the flimflam of a 
seemingly legitimate bank's financing their debts.... As soon as the 
Bank of England was chartered in 1694, King William himself and 
various members of Parliament rushed to become shareholders of the 
new money factory they had just created. 1 


Both groups within the Cabal were handsomely rewarded for 
their efforts. The political scientists had been seeking about 
£500,000 to finance the current war. The Bank promptly gave them 
more than twice what they originally sought. The monetary 
scientists started with a pledged capital investment of £1,200,000. 
Textbooks tell us that this was lent to the government at 8% 
interest, but what is usually omitted is the fact that, at the time the 
loan was made, only £720,000 had been invested, which means the 
Bank "loaned" 66% more than it had on hand. 2 Furthermore, the 
Bank was given the privilege of creating at least an equal amount of 
money in the form of loans to the public. So, after lending their 
capital to the government, they still had it available to loan out a 
second time. 

An honest loan of their £720,000 at 8% would have yielded 
£57,600 interest. But, with the new secret science, they were able to 
earn 8% on £1,200,000 given to the government plus an estimated 
9% on £720,000 loaned to the public. That adds up to £160,800, 
more than 22% on their investment. The real point, however, is 
that, under these circumstances, it is meaningless to talk about a 
rate of interest. When money is created out of nothing, the true 
interest rate is not 8% or 9% or even 22%. It is infinity. 

In this first official act of the world's first central bank can be 
seen the grand pretense that has characterized all those which have 
followed. The Bank pretended to make a loan but what it really did 
Was to manufacture the money for government's use. If the govern- 
ment had done this directly, the fiat nature of the currency would 

Rothbard, Mystery, p. 180. 
2- See R.D. Richards, Ph.D., The Early History of Banking in England (New York- 
Augustus M. Kelley, original edition 1929, reprinted 1965), pp. 148-50. 

ikEATURE from jekyll island 

178 TK 'J 

been immediately recognized, and it probably would not 
have been accepted at full face value in payment for the expenses of 
war. By creating money through the banking system, however, the 
process became mystifying to the general public. The newly created 
bills and notes were indistinguishable from those previously 
backed by coin, and the public was none the wiser. 

The reality of central banks, therefore — and we must not forget 
that the Federal Reserve System is such a creature — is that, under 
the guise of purchasing government bonds, they act as hidden 
money machines which can be activated any time the politicians 
want. This is a godsend to the political scientists who no longer 
must depend on taxes or the good credit of their treasury to raise 
money. It is even easier than printing and, because the process is 
not understood by the public, it is politically safe. 

The monetary scientists, of course, are amply paid for this 
service. To preserve the pretense of banking, it is said they collect 
interest, but this is a misnomer. They didn't lend money, they 
created it. Their compensation, therefore, should be called what it 
is: a professional fee, or commission, or royalty, or kickback, 
depending on your perspective, but not interest. 


The new money created by the Bank of England splashed 
through the economy like rain in April. The country banks outside 
of the London area were authorized to create money on their own, 
but they had to hold a certain percentage of either coin or Bank of 
England certificates in reserve. Consequently, when these plentiful 
banknotes landed in their hands, they quickly put them into the 
vaults and then issued their own certificates in even greater 
amounts. As a result of this pyramiding effect, prices rose 100% in 
just two years. Then, the inevitable happened: There was a run on 
the bank, and the Bank of England could not produce the coin. 

When banks cannot honor their contracts to deliver coin in 
return for their receipts, they are, in fact, bankrupt. They should be 
allowed to go out of business and liquidate their assets to satisfy 
their creditors just like any other business. This, in fact, is what 
always had happened to banks which loaned out their deposits and 
created fractional money. Had this practice been allowed to con- 
tinue, there is little doubt that people eventually would have 
understood that they simply do not want to do business with those 



kinds of banks. Through the painful but highly effective process of 

tnal and error, mankind would have learned to distinguish real 

money from fool's gold. And the world would be a lot better 
because of it today. 

That, of course, was not allowed to happen. The Cabal is a 
partnership, and each of the two groups is committed to protect each 
other, not out of loyalty, but out of mutual self interest. They know 
that, if one falls, so does the other. It is not surprising, therefore 
that, when there was a run on the Bank of England, Parliament 
intervened In May of 1696, just two years after the Bank was 
formed, a law was passed authorizing it to "suspend payment in 
specie. By force of law, the Bank was now exempted from having 
to honor its contract to return the gold. 


This was a fateful event in the history of money, because the 
precedent has been followed ever since. In Europe and America 
the banks have always operated with the assumption that their 
Partners in government will come to their aid when they get into 
rouble. Politicians may speak about "protecting the public," but 
the underlining reality is that the government needs the fiat money 
produced by the banks. The banks, therefore-at least the big 

It is commonly observed in modern times that criminals often 

are treated lightly when they rob their neighbor. But if they steal 

trom the government or a bank, the penalties are harsh. This is 

merely another manifestation of the Cabal's partnership. In the 

eyes of government, banks are special, and it has been that way even 

trom the beginning of their brotherhood. For example, Galbraith 
tells us: 


against the Catholic Relief Acts, the Bank was a principal target It signified the Establishment. 


to react. When the siege of the Bank began, things were thought more 
serious. Troops intervened, and ever since soldiers have been sent to 
guard the Bank by night. 1 



Once the Bank of England had been legally protected from (lie 
consequences of converting debt into money, the British economy 
was doomed to a nauseating roller-coaster ride of inflation, booms, 
and busts The natural and immediate result was the granting of 
massive loans for just about any wild scheme imaginable. Why not? 
The money cost nothing to make, and the potential profits could be 
enormous. So the Bank of England, and the country banks which 
pyramided their own money supply on top of the Bank s supply, 
pumped a steady stream of new money into the economy. Great 
stock companies were formed and financed by this money. One 
was for the purpose of draining the Red Sea to recover the gold 
supposedly lost by the Egyptians when pursuing the Isrealites. 
£150,000,000 were siphoned into vague and fruitless ventures in 

South America and Mexico. 

The result of this flood of new money — how many times must 
history repeat it?-was even more inflation. In 1810, the House of 
Commons created a special committee, called the Select Committee 
on the High Price of Gold Bullion, to explore the problem and to 
find a solution. The verdict handed down in the final report was a 
model of clarity. Prices were not going up, it said. The value of the 
currency was going down, and that was due to the fact that it was 
being created at a faster rate than the creation of goods to be 
purchased with it. The solution? The committee recommended that 
the notes of the Bank of England be made fully convertible into 
gold coin, thus putting a brake on the supply of money that could 

be created. 


One of the most outspoken proponents of a true gold standard 
was a Jewish London stockbroker by the name of David Ricardo. 
Ricardo argued that an ideal currency "should be absolutely 
invariable in value." 1 He conceded that precious metals were not 
perfect in this regard because they do shift in purchasing power to 
a small degree. Then he said: "They are, however, the best with 
which we are acquainted." 

l David Ricardo, The Works and Correspondence of David Ricardo: Pamphlets 1825- 

1823, Piero Sraffa, ed. (Cambridge: Cambridge University Press, 1951), Vol. IV, 
p. 58. 

2. Ibid., p. 62. 



Almost everyone in government agreed with Ricardo's assess- 
ment, but, as is often the case, theoretical truth was fighting a losing 
battle against practical necessity. Men's opinions on the best form 
of money were one thing. The war with Napoleon was another, and 
it demanded a constant inflow of funding. England continued to 
use the central-bank mechanism to extract that revenue from the 


By 1815, prices had doubled again and then fell sharply. The 
Corn Act was passed that year to protect local growers from 
lower-priced imports. Then, when corn and wheat prices began to 
climb once more in spite of the fact that wages and other prices 
were falling, there was widespread discontent and rebellion. "By 
1816," notes Roy Jastram, "England was in deep depression. There 
was stagnation of industry and trade generally; the iron and coal 
industries were paralyzed.... Riots occurred spasmodically from 
May through December." 1 

In 1821, after the war had ended and there was no longer a need 
to fund military campaigns, the political pressure for a gold 
standard became too strong to resist, and the Bank of England 
returned to a convertibility of its notes into gold coin. The basic 
central-bank mechanism was not dismantled, however. It was 
merely limited by a new formula regarding the allowable fraction 
of reserves. The Bank continued to create money out of nothing for 
the purpose of lending and, within a year, the flower of a new 
business boom unfolded. Then, in November of 1825, the flower 
matured into its predestined fruit. The crisis began with the 
collapse of Sir Peter Cole and Company and was soon followed by 
the failure of sixty-three other banks. Fortunes were wiped out and 
the economy plunged back into depression. 

When a similar crisis with still more bank failures struck again 
in 1839, Parliament attempted to come to grips with the problem. 
After five more years of analysis and debate, Sir Robert Peel 
succeeded in passing a banking reform act. It squarely faced the 
cause of England's booms and busts: an elastic money supply. What 
Peel's Bank Act of 1844 attempted to do was to limit the amount of 
money the banks could create to roughly the same as it would be if 

1- Roy W. Jastram, The Golden Constant (New York: Wiley, 1977), p. 113. 


their banknotes were backed by gold or silver. It was a good try, 
but it ultimately failed because it fell short on three counts: (1) It 
was a political compromise and was not strict enough, allowing the 
banks to still create lending money out of nothing to the extent of 
£14,000,000; in other words, a "fractional" amount thought to be 
safe at the time; (2) The limitation applied only to paper currency 
issued by the Bank. It did not apply to checkbook money, and that 
was then becoming the preferred form of exchange. Consequently, 
the so-called reform did not even apply to the area where the 
greatest amount of abuse was taking place; and (3) The basic 
concept was allowed to remain unchallenged that man, in his 
infinite political wisdom, can determine what the money supply 
should be more effectively than an unmanaged system of gold or 
silver responding to the law of supply and demand. 


Within three years of the "reform," England faced another crisis 
with still more bank failures and more losses to depositors. But 
when the Bank of England tottered on the edge of insolvency, once 
again the government intervened. In 1847, the Bank was exempted 
from the legal reserve requirements of the Peel Act. Such is the 
rock-steady dependability of man-made limits to the money 

Groseclose continues the story: 

Ten years later, in 1857, another crisis occurred, due to excessive 
and unwise lending as a result of over-optimism regarding foreign 
trade prospects. The bank found itself in the same position as in 1847, 
and similar measures were taken. On this occasion the bank was 
forced to use the authority to increase its fiduciary [debt-based money] 
issue beyond the limit imposed by the Bank Charter Act.... 

Again in 1866, the growth of banking without sufficient attention 
to liquidity, and the use of bank credit to support a speculative 
craze. ..prepared the way for a crash which was finally precipitated by 
the failure of the famous house of Overend, Gurney and Co. The Act of 
1844 was once more suspended.... 

In 1890, the Bank of England once again faced crisis, again the 
result of widespread and excessive speculation in foreign securities, 
particularly American and Argentine. This time it was the failure of 
Baring Brothers that precipitated the crash. 

1. Groseclose, Money and Man, pp. 195-96. 




It is an incredible fact of history that, in spite of the general and 
recurring failures of the Bank of England during these years, the 
central-bank mechanism was so attractive to the political and 
monetary scientists that it became the model for all of Europe. The 
Bank of Prussia became the Reichsbank. Napoleon established the 
Banque de France. A few decades later, the concept became the 
venerated model for the Federal Reserve System. Who cares if the 
scheme is destructive? Here is the perfect tool for obtaining 
unlimited funding for politicians and endless profits for bankers. 
And, best of all, the little people who pay the bills for both groups 
have practically no idea what is being done to them. 


The business of banking began in Europe in the fourteenth 
century. Its function was to evaluate, exchange, and safeguard 
people's coins. In the beginning, there were notable examples of 
totally honest banks which operated with remarkable efficiency 
considering the vast variety of coinage they handled. They also 
issued paper receipts which were so dependable they freely 
circulated as money and cheated no one in the process. But there 
was a great demand for more money and more loans, and the 
temptation soon caused the bankers to seek easier paths. They 
began lending out pieces of paper that said they were receipts, but 
which in fact were counterfeit. The public could not tell one from 
the other and accepted both of them as money. From that point 
forward, the receipts in circulation exceeded the gold held in 
reserve, and the age of fractional-reserve banking had dawned. 
This led immediately to what would become an almost unbroken 
record from then to the present: a record of inflation, booms and 
busts, suspension of payments, bank failures, repudiation of cur- 
rencies, and recurring spasms of economic chaos. 

The Bank of England was formed in 1694 to institutionalize 
fractional-reserve banking. As the world's first central bank, it 
introduced the concept of a partnership between bankers and 
politicians. The politicians would receive spendable money (cre- 
ated out of nothing by the bankers) without having to raise taxes. In 
return, the bankers would receive a commission on the transac- 
tion—deceptively called interest— which would continue in perpe- 
tuity. Since it all seemed to be wrapped up in the mysterious rituals 


of banking, which the common man was not expected to under- 
stand, there was practically no opposition to the scheme. The 
arrangement proved so profitable to the participants that it soon 
spread to many other countries in Europe and, eventually, to the 
United States. 

Chapter Ten 


The method by which the Federal Reserve creates 
money out of nothing; the concept of usury as the 
payment of interest on pretended loans; the true 
cause of the hidden tax called inflation; the way in 
which the Fed creates boom-bust cycles. 

In the 1940s, there was a comic strip character called Mandrake 
the Magician. His specialty was creating things out of nothing and, 
when appropriate, to make them disappear back into that same 
void. It is fitting, therefore, that the process to be described in this 
section should be named in his honor. 

In the previous chapters, we examined the technique developed 
by the political and monetary scientists to create money out of noth- 
ing for the purpose of lending. This is not an entirely accurate 
description because it implies that money is created first and then 
waits for someone to borrow it. On the other hand, textbooks on 
banking often state that money is created out of debt. This also is 
misleading because it implies that debt exists first and then is 
converted into money. In truth, money is not created until the 
instant it is borrowed. It is the act of borrowing which causes it to 
spring into existence. And, incidentally, it is the act of paying off the 
debt that causes it to vanish. 1 There is no short phrase that perfectly 
describes that process. So, until one is invented along the way, we 
shall continue using the phrase "create money out of nothing" and 
occasionally add "for the purpose of lending" where necessary to 
further clarify the meaning. 

i- Printed Federal Reserve Notes that sit in the Treasury's vault do not become 
money until they are released into circulation in exchange for checkbook money 
that was created by a bank loan. As long as the bills are in the vault with no 
debt-based money to replace them, they technically are just paper, not money. 



So, let us now leave the historical figures of the past and jump 
into their "future," in other words, into our present, and see just how 
far this money/ debt-creation process has been carried — and how it 

The first fact that needs to be considered is that our money today 
has no gold or silver behind it whatsoever. The fraction is not 54% 
nor 15%. It is 0%. It has travelled the path of all previous fractional 
money in history and already has degenerated into pure fiat money. 
The fact that most of it is in the form of checkbook balances rather 
than paper currency is a mere technicality; and the fact that bankers 
speak about "reserve ratios" is eye wash. The so-called reserves to 
which they refer are, in fact, Treasury bonds and other certificates of 
debt. Our money is pure fiat through and through. 

The second fact that needs to be clearly understood is that, in 
spite of the technical jargon and seemingly complicated procedures, 
the actual mechanism by which the Federal Reserve creates money 
is quite simple. They do it exactly the same way the goldsmiths of 
old did except, of course, the goldsmiths were limited by the need to 
hold some precious metal in reserve, whereas the Fed has no such 


The Federal Reserve itself is amazingly frank about this process. 
A booklet published by the Federal Reserve Bank of New York tells 
us: "Currency cannot be redeemed, or exchanged, for Treasury gold 
or any other asset used as backing. The question of just what assets 
'back' Federal Reserve notes has little but bookkeeping signifi- 
cance." 1 

Elsewhere in the same publication we are told: "Banks are creat- 
ing money based on a borrower's promise to pay (the IOU)... Banks 
create money by 'monetizing' the private debts of businesses and 
individuals." 2 

In a booklet entitled Modern Money Mechanics, the Federal 
Reserve Bank of Chicago says: 

In the United States neither paper currency nor deposits have 
value as commodities. Intrinsically, a dollar bill is just a piece of paper. 
Deposits are merely book entries. Coins do have some intrinsic value 
as metal, but generally far less than their face amount. 

1. I Bet You Thought, Federal Reserve Bank of New York, p. 11. 

2. Ibid., p. 19. 



What, then, makes these instruments — checks, paper money, and 
coins — acceptable at face value in payment of all debts and for other 
monetary uses? Mainly, it is the confidence people have that they will 
be able to exchange such money for other financial assets and real 
goods and services whenever they choose to do so. This partly is a 
matter of law; currency has been designated "legal tender" by the 
government — that is, it must be accepted. 1 

In the fine print of a footnote in a bulletin of the Federal Reserve 
Bank of St. Louis, we find this surprisingly candid explanation: 

Modern monetary systems have a fiat base — literally money by 
decree — with depository institutions, acting as fiduciaries, creating 
obligations against themselves with the fiat base acting in part as 
reserves. The decree appears on the currency notes: "This note is legal 
tender for all debts, public and private." While no individual could 
refuse to accept such money for debt repayment, exchange contracts 
could easily be composed to thwart its use in everyday commerce. 
However, a forceful explanation as to why money is accepted is that 
the federal government requires it as payment for tax liabilities. 
Anticipation of the need to clear this debt creates a demand for the 
pure fiat dollar. 


It is difficult for Americans to come to grips with the fact that 
their total money supply is backed by nothing but debt, and it is 
even more mind boggling to visualize that, if everyone paid back all 
that was borrowed, there would be no money left in existence. That's 
right, there would be not one penny in circulation— all coins and all 
paper currency would be returned to bank vaults — and there would 
be not one dollar in any one's checking account. In short, all money 
would disappear. 

Marriner Eccles was the Governor of the Federal Reserve Sys- 
tem in 1941. On September 30 of that year, Eccles was asked to give 
testimony before the House Committee on Banking and Currency. 
The purpose of the hearing was to obtain information regarding the 
role of the Federal Reserve in creating conditions that led to the de- 
pression of the 1930s. Congressman Wright Patman, who was 
Chairman of that committee, asked how the Fed got the money to 

1. Modern Money Mechanics, Federal Reserve Bank of Chicago, revised October 
1982, p. 3. 

2. "Money, Credit and Velocity," Review, May, 1982, Vol. 64, No. 5, Federal 
Reserve Bank of St. Louis, p. 25. 


purchase two billion dollars worth of government bonds in 1933. 
This is the exchange that followed. 

ECCLES: We created it. 
PATMAN: Out of what? 

ECCLES: Out of the right to issue credit money. 

PATMAN: And there is nothing behind it, is there, except our 

government's credit? 
ECCLES: That is what our money system is. If there were no 

debts in our money system, there wouldn't be any money. 

It must be realized that, while money may represent an asset to 
selected individuals, when it is considered as an aggregate of the 
total money supply, it is not an asset at all. A man who borrows 
$1,000 may think that he has increased his financial position by that 
amount but he has not. His $1,000 cash asset is offset by his $1,000 
loan liability, and his net position is zero. Bank accounts are exactly 
the same on a larger scale. Add up all the bank accounts in the 
nation, and it would be easy to assume that all that money repre- 
sents a gigantic pool of assets which support the economy. Yet, 
every bit of this money is owed by someone. Some will owe 
nothing. Others will owe many times what they possess. All added 
together, the national balance is zero. What we think is money is but 
a grand illusion. The reality is debt. 

Robert Hemphill was the Credit Manager of the Federal Reserve 
Bank in Atlanta. In the foreword to a book by Irving Fisher, entitled 
100% Money, Hemphill said this: 

If all the bank loans were paid, no one could have a bank deposit, 
and there would not be a dollar of coin or currency in circulation. This 
is a staggering thought. We are completely dependent on the 
commercial banks. Someone has to borrow every dollar we have in 
circulation, cash, or credit. If the banks create ample synthetic money 
we are prosperous; if not, we starve. We are absolutely without a 
permanent money system. When one gets a complete grasp of the 
picture, the tragic absurdity of our hopeless situation is almost 
incredible — but there it is. 1 

With the knowledge that money in America is based on debt, it 
should not come as a surprise to learn that the Federal Reserve 
System is not the least interested in seeing a reduction in debt in this 

1. Irving Fisher, 200% Money (New York: Adelphi, 1936), p. xxii. 



country, regardless of public utterances to the contrary. Here is the 
bottom line from the System's own publications. The Federal 
Reserve Bank of Philadelphia says: "A large and growing number of 
analysts, on the other hand, now regard the national debt as some- 
thing useful, if not an actual blessing.... [They believe] the national 
debt need not be reduced at all." 1 

The Federal Reserve Bank of Chicago adds: "Debt — public and 
private— is here to stay. It plays an essential role in economic proc- 
esses.. .. What is required is not the abolition of debt, but its prudent 
use and intelligent management." 2 


There is a kind of fascinating appeal to this theory. It gives those 
who expound it an aura of intellectualism, the appearance of being 
able to grasp a complex economic principle that is beyond the com- 
prehension of mere mortals. And, for the less academically minded, 
it offers the comfort of at least sounding moderate. After all, what's 
wrong with a little debt, prudently used and intelligently managed? 
The answer is nothing, provided the debt is based on an honest trans- 
action. There is plenty wrong with it if it is based upon fraud. 

An honest transaction is one in which a borrower pays an 
agreed upon sum in return for the temporary use of a lender's asset. 
That asset could be anything of tangible value. If it were an automo- 
bile, for example, then the borrower would pay "rent." If it is 
money, then the rent is called "interest." Either way, the concept is 
the same. 

When we go to a lender — either a bank or a private party— and 
receive a loan of money, we are willing to pay interest on the loan in 
recognition of the fact that the money we are borrowing is an asset 
which we want to use. It seems only fair to pay a rental fee for that 
asset to the person who owns it. It is not easy to acquire an automo- 
bile, and it is not easy to acquire money— real money, that is. If the 
money we are borrowing was earned by someone's labor and talent, 
they are fully entitled to receive interest on it. But what are we to 
think of money that is created by the mere stroke of a pen or the 
click of a computer key? Why should anyone collect a rental fee on 

1- The National Debt, Federal Reserve Bank of Philadelphia, pp. 2,11. 
• Two Faces of Debt, Federal Reserve Bank of Chicago, p. 33. 


When banks place credits into your checking account, they are 
merely pretending to lend you money. In reality, they have nothing 
to lend. Even the money that non-indebted depositors have placed 
with them was originally created out of nothing in response to 
someone else's loan. So what entitles the banks to collect rent on 
nothing? It is immaterial that men everywhere are forced by law to 
accept these nothing certificates in exchange for real goods and 
services. We are talking here, not about what is legal, but what is 
moral. As Thomas Jefferson observed at the time of his protracted 
battle against central banking in the United States, "No one has a 
natural right to the trade of money lender, but he who has money to 
lend." 1 


Centuries ago, usury was defined as any interest charged for a 
loan. Modern usage has redefined it as excessive interest. Certainly, 
any amount of interest charged for a pretended loan is excessive. The 
dictionary, therefore, needs a new definition. Usury: The charging of 
any interest on a loan of fiat money. 

Let us, therefore, look at debt and interest in this light. Thomas 
Edison summed up the immorality of the system when he said: 

People who will not turn a shovel full of dirt on the project nor 
contribute a pound of materials will collect more money. ..than will the 
people who will supply all the materials and do all the work. 

Is that an exaggeration? Let us consider the purchase of a 
$100,000 home in which $30,000 represents the cost of the land, 
architect's fee, sales commissions, building permits, and that sort of 
thing and $70,000 is the cost of labor and building materials. If the 
home buyer puts up $30,000 as a down payment, then $70,000 must 
be borrowed. If the loan is issued at 11% over a 30-year period, the 
amount of interest paid will be $167,806. That means the amount 
paid to those who loan the money is about 21/2 times greater than 

1. The Writings ofThomas Jefferson, Library Edition (Washington: Jefferson Memo- 
rial Association, 1903), Vol XIII, p. 277-78. 

2. As quoted by Brian L. Bex, The Hidden Hand (Spencer, Indiana: Owen Litho, 
1975), p. 161. Unfortunately, Edison did not understand the whole problem. He was 
correctly opposed to paying interest to banks for their fiat money, but he was not 
opposed to government fiat money. It was only the interest to which he objected. He 
did not see the larger picture of how fiat money, even when issued solely by the 
government and without interest, has always been destructive of the economy 
through the creation of inflation, booms, and busts. 



paid to those who provide all the labor and all the materials. It is 
true that this figure represents the time-value of that money over 
thirty years and easily could be justified on the basis that a lender 
deserves to be compensated for surrendering the use of his capital 
for half a lifetime. But that assumes the lender actually had some- 
thing to surrender, that he had earned the capital, saved it, and then 
loaned it for construction of someone else's house. What are we to 
think, however, about a lender who did nothing to earn the money, 
had not saved it, and, in fact, simply created it out of thin air? What 
is the time-value of nothing? 

As we have already shown, every dollar that exists today, either 
in the form of currency, checkbook money, or even credit card 
money — in other words, our entire money supply — exists only 
because it was borrowed by someone; perhaps not you, but someone. 
That means all the American dollars in the entire world are earning 
daily and compounded interest for the banks which created them. A 
portion of every business venture, every investment, every profit, 
every transaction which involves money— and that even includes 
tosses and the payment of taxes — a portion of all that is earmarked as 
payment to a bank. And what did the banks do to earn this perpetu- 
ally flowing river of wealth? Did they lend out their own capital 
obtained through the investment of stockholders? Did they lend out 
the hard-earned savings of their depositors? No, neither of these 
were their major source of income. They simply waved the magic 
wand called fiat money. 

The flow of such unearned wealth under the guise of interest 
can only be viewed as usury of the highest magnitude. Even if there 
were no other reasons to abolish the Fed, the fact that it is the supreme 
instrument of usury would be more than sufficient by itself. 


One of the most perplexing questions associated with this proc- 
ess is 'Where does the money come from to pay the interest?" If you 
borrow $10,000 from a bank at 9%, you owe $10,900. But the bank 
only manufactures $10,000 for the loan. It would seem, therefore, 
that there is no way that you — and all others with similar loans — 
can possibly pay off your indebtedness. The amount of money put 
into circulation just isn't enough to cover the total debt, including 
interest. This has led some to the conclusion that it is necessary for 
you to borrow the $900 for the interest, and that, in turn, leads to still 


more interest. The assumption is that, the more we borrow, the more 
we have to borrow, and that debt based on fiat money is a never- 
ending spiral leading inexorably to more and more debt. 

This is a partial truth. It is true that there is not enough money 
created to include the interest, but it is a fallacy that the only way to 
pay it back is to borrow still more. The assumption fails to take into 
account the exchange value of labor. Let us assume that you pay 
back your $10,000 loan at the rate of approximately $900 per month 
and that about $80 of that represents interest. You realize you arc 
hard pressed to make your payments so you decide to take on a 
part-time job. The bank, on the other hand, is now making $80 profit 
each month on your loan. Since this amount is classified as "inter- 
est," it is not extinguished as is the larger portion which is a return 
of the loan itself. So this remains as spendable money in the account 
of the bank. The decision then is made to have the bank's floors 
waxed once a week. You respond to the ad in the paper and are 
hired at $80 per month to do the job. The result is that you earn the 
money to pay the interest on your loan, and — this is the point— the 
money you receive is the same money which you previously had 
paid. As long as you perform labor for the bank each month, the 
same dollars go into the bank as interest, then out the revolving 
door as your wages, and then back into the bank as loan repayment. 

It is not necessary that you work directly for the bank. No matter 
where you earn the money, its origin was a bank and its ultimate 
destination is a bank. The loop through which it travels can be large 
or small, but the fact remains all interest is paid eventually by 
human effort. And the significance of that fact is even more startling 
than the assumption that not enough money is created to pay back 
the interest. It is that the total of this human effort ultimately is for 
the benefit of those who create fiat money. It is a form of modern 
serfdom in which the great mass of society works as indentured 
servants to a ruling class of financial nobility. 


That's really all one needs to know about the operation of the 
banking cartel under the protection of the Federal Reserve. But it 
would be a shame to stop here without taking a look at the actual 
cogs, mirrors, and pulleys that make the magical mechanism work. 
It is a truly fascinating engine of mystery and deception. Let us, 
therefore, turn our attention to the actual process by which the 



magicians create the illusion of modern money. First we shall stand 
back for a general view to see the overall action. Then we shall move 
in closer and examine each component in detail. 



The entire function of this machine is to convert debt 
into money. It's just that simple. First, the Fed takes all 
the government bonds which the public does not buy 
and writes a check to Congress in exchange for them. (It 
acquires other debt obligations as well, but government 
bonds comprise most of its inventory.) There is no 
money to back up this check. These fiat dollars are cre- 
ated on the spot for that purpose. By calling those bonds 
"reserves," the Fed then uses them as the base for creat- 
ing 9 additional dollars for every dollar created for the 
bonds themselves. The money created for the bonds is 
spent by the government, whereas the money created on 
top of those bonds is the source of all the bank loans 
made to the nation's businesses and individuals. The 
result of this process is the same as creating money on a 
printing press, but the illusion is based on an accounting 
trick rather than a printing trick. The bottom line is that 
Congress and the banking cartel have entered into a 
partnership in which the cartel has the privilege of 
collecting interest on money which it creates out of noth- 
ing, a perpetual override on every American dollar that 
exists in the world. Congress, on the other hand, has 
access to unlimited funding without having to tell the 
voters their taxes are being raised through the process of 
inflation. If you understand this paragraph, you under- 
stand the Federal Reserve System. 


Now for a more detailed view. There are three general ways in 
which the Federal Reserve creates fiat money out of debt. One is by 
making loans to the member banks through what is called the 
Discount Window. The second is by purchasing Treasury bonds and 


other certificates of debt through what is called the Open Market 
Committee. The third is by changing the so-called reserve ratio that 
member banks are required to hold. Each method is merely a differ- 
ent path to the same objective: taking in IOUs and converting them 
into spendable money. 


The Discount Window is merely bankers' language for the loan 
window. When banks run short of money, the Federal Reserve 
stands ready as the "bankers' bank" to lend it. There are many rea- 
sons for them to need loans. Since they hold "reserves" of only 
about one or two per cent of their deposits in vault cash and eight or 
nine per cent in securities, their operating margin is extremely thin. 
It is common for them to experience temporary negative balances 
caused by unusual customer demand for cash or unusually large 
clusters of checks all clearing through other banks at the same time. 
Sometimes they make bad loans and, when these former "assets" 
are removed from their books, their "reserves" are also decreased 
and may, in fact, become negative. Finally, there is the profit motive. 
When banks borrow from the Federal Reserve at one interest rate 
and lend it out at a higher rate, there is an obvious advantage. But 
that is merely the beginning. When a bank borrows a dollar from the 
Fed, it becomes a one-dollar reserve. Since the banks are required to 
keep reserves of only about ten per cent, they actually can loan up to 
nine dollars for each dollar borrowed. 1 

Let's take a look at the math. Assume the bank receives $1 mil- 
lion from the Fed at a rate of 8%. The total annual cost, therefore, is 
$80,000 (.08 X $1,000,000). The bank treats the loan as a cash deposit, 
which means it becomes the basis for manufacturing an additional 
$9 million to be lent to its customers. If we assume that it lends that 
money at 11% interest, its gross return would be $990,000 (.11 X 
$9,000,000). Subtract from this the bank's cost of $80,000 plus an 
appropriate share of its overhead, and we have a net return of about 
$900,000. In other words, the bank borrows a million and can almost 

1. This 10% figure (ten-to-one ratio) is based on averages. The Federal Reserve 
requires a minimum reserve of 10% on deposits over $46.8 million but only 3% on 
deposits up to that amount. Deposits in Eurodollars and nonpersonal time deposits 
require no reserves at all. Reserves consist of vault cash and deposits at the Federal 
Reserve. See Regulation D; Reserve Requirements of Depository Institutions, Federal 
Reserve document 12 CFR 204; as amended effective December 22,1992, p. 23. 


double it in one year. 1 That's leverage*. But don't forget the source of 
that leverage: the manufacture of another $9 million which is added 
to the nation's money supply. 


The most important method used by the Federal Reserve for the 
creation of fiat money is the purchase and sale of securities on the 
open market. But, before jumping into this, a word of warning. 
Don't expect what follows to make any sense. Just be prepared to 
know that this is how they do it. 

The trick lies in the use of words and phrases which have tech- 
nical meanings quite different from what they imply to the average 
citizen. So keep your eye on the words. They are not meant to 
explain but to deceive. In spite of first appearances, the process is 
not complicated. It is just absurd. 


Start with... 


The federal government adds ink to a piece of paper, 
creates impressive designs around the edges, and calls it 
a bond or Treasury note. It is merely a promise to pay a 
specified sum at a specified interest on a specified date. 
As we shall see in the following steps, this debt eventu- 
ally becomes the foundation for almost the entire 
nation's money supply. 2 In reality, the government has 
created cash, but it doesn't yet look like cash. To convert 
these IOUs into paper bills and checkbook money is the 
function of The Federal Reserve System. To bring about 
that transformation, the bond is given to the Fed where it 
is then classified as a ... 


(Continued on next page) 

1 |i b a n k S mUSt COVer these ,oans with bonds or other illtefest-bearinS aSSetS 

which it possesses, but that does not diminish the money-multiplier effect of the 
new deposit. 

2 - Debt obligations from the private sector and from other governments also are 
used in the same way, but government bonds are the primary instruments. 


(Continued from previous page) 


An instrument of government debt is considered an 
asset because it is assumed the government will keep its 
promise to pay. This is based upon its ability to obtain 
whatever money it needs through taxation. Thus, the 
strength of this asset is the power to take back that which 
it gives. So the Federal Reserve now has an "asset" 
which can be used to offset a liability. It then creates this 
liability by adding ink to yet another piece of paper and 
exchanging that with the government in return for the 
asset. That second piece of paper is a ... 



There is no money in any account to cover this check. 
Anyone else doing that would be sent to prison. It is 
legal for the Fed, however, because Congress wants the 
money, and this is the easiest way to get it. (To raise 
taxes would be political suicide; to depend on the public 
to buy all the bonds would not be realistic, especially if 
interest rates are set artificially low; and to print very 
large quantities of currency would be obvious and con- 
troversial.) This way, the process is mysteriously 
wrapped up in the banking system. The end result, how- 
ever, is the same as turning on government printing 
presses and simply manufacturing fiat money (money 
created by the order of government with nothing of tan- 
gible value backing it) to pay government expenses. Yet, 
in accounting terms, the books are said to be "balanced" 
because the liability of the money is offset by the "asset" 
of the IOU. The Federal Reserve check received by the 
government then is endorsed and sent back to one of the 
Federal Reserve banks where it now becomes a ... 

(Continued from previous page) 



Once the Federal Reserve check has been deposited into 
the government's account, it is used to pay government 
expenses and, thus, is transformed into many ... 


These checks become the means by which the first wave 
of fiat money floods into the economy. Recipients now 
deposit them into their own bank accounts where they 


Commercial bank deposits immediately take on a split 
personality. On the one hand, they are liabilities to the 
bank because they are owed back to the depositors. But, 
as long as they remain in the bank, they also are consid- 
ered as assets because they are on hand. Once again, the 
books are balanced: the assets offset the liabilities. But 
the process does not stop there. Through the magic of 
fractional-reserve banking, the deposits are made to 
serve an additional and more lucrative purpose. To 
accomplish this, the on-hand deposits now become 
\ reclassified in the books and called ... 


Reserves for what? Are these for paying off depositors 
should they want to close out their accounts? No. That's 
the lowly function they served when they were classified 
as mere assets. Now that they have been given the name 
of "reserves," they become the magic wand to material- 
ize even larger amounts of fiat money. This is where the 
real action is: at the level of the commercial banks. Here's 
how it works. The banks are permitted by the Fed to 
hold as little as 10% of their deposits in "reserve." That 
means, if they receive deposits of $1 million from the 
first wave of fiat money created by the Fed, they have 


$900,000 more than they are required to keep on hand 
($1 million less 10% reserve). In bankers' language, that 
$900,000 is called... 


The word "excess" is a tipoff that these so-called 
reserves have a special destiny. Now that they have been 
transmuted into an excess, they are considered as avail- 
able for lending. And so in due course these excess 
reserves are converted into ... 


But wait a minute. How can this money be loaned out 
when it is owned by the original depositors who are still 
free to write checks and spend it any time they wish? 
Isn't that a double claim against the same money? The 
answer is that, when the new loans are made, they arc 
not made with the same money at all. They are made 
with brand new money created out of thin air for that 
purpose. The nation's money supply simply increases by 
ninety per cent of the bank's deposits. Furthermore, this 
new money is far more interesting to the banks than the 
old. The old money, which they received from deposi- 
tors, requires them to pay out interest or perform serv- 
ices for the privilege of using it. But, with the new 
money, the banks collect interest, instead, which is not 
too bad considering it cost them nothing to make. Nor is 
that the end of the process. When this second wave of fiat 
money moves into the economy, it comes right back into 
the banking system, just as the first wave did, in the form 



The process now repeats but with slightly smaller num- 
bers each time around. What was a "loan" on Friday 
comes back into the bank as a "deposit" on Monday. The 
deposit then is reclassified as a "reserve" and ninety per 
cent of that becomes an "excess" reserve which, once 
again, is available for a new "loan." Thus, the $1 million 



of first wave fiat money gives birth to $900,000 in the 
second wave, and that gives birth to $810,000 in the third 
wave ($900,000 less 10% reserve). It takes about twenty- 
eight times through the revolving door of deposits 
becoming loans becoming deposits becoming more 
loans until the process plays itself out to the maximum 
effect, which is... 


The amount of fiat money created by the banking cartel 
is approximately nine times the amount of the original 
government debt which made the entire process possi- 
ble. When the original debt itself is added to that figure, 
we finally have ... 


The total amount of fiat money created by the Federal 
Reserve and the commercial banks together is approxi- 
mately ten times the amount of the underlying govern- 
ment debt. To the degree that this newly created money 
floods into the economy in excess of goods and services, 
it causes the purchasing power of all money, both old 
and new, to decline. Prices go up because the relative 
value of the money has gone down. The result is the 
same as if that purchasing power had been taken from us 
in taxes. The reality of this process, therefore, is that it is 

a. . . 


Without realizing it, Americans have paid over the 
years, in addition to their federal income taxes and excise 
taxes, a completely hidden tax equal to many times the 
national debt! And that still is not the end of the process. 
Since our money supply is purely an arbitrary entity 
with nothing behind it except debt, its quantity can go 

1- That is a theoretical maximum. In actual practice, the banks can seldom loan out 
all of the money they are allowed to create, and the numbers fall short of the 



down as well as up. When people are going deeper into 
debt, the nation's money supply expands and prices go 
up, but when they pay off their debts and refuse to 
renew, the money supply contracts and prices tumble. 
That is exactly what happens in times of economic or 
political uncertainty. This alternation between periods of 
expansion and contraction of the money supply is the 
underlying cause of... 


Who benefits from all of this? Certainly not the average 
citizen. The only beneficiaries are the political scientists 
in Congress who enjoy the effect of unlimited revenue to 
perpetuate their power, and the monetary scientists 
within the banking cartel called the Federal Reserve 
System who have been able to harness the American 
people, without their knowing it, to the yoke of modern 


The previous figures are based on a "reserve" ratio of 10% (a 
money-expansion ratio of 10-to-l). It must be remembered, how- 
ever, that this is purely arbitrary. Since the money is fiat with no 
precious-metal backing, there is no real limitation except what the 
politicians and money managers decide is expedient for the 
moment. Altering this ratio is the third way in which the Federal 
Reserve can influence the nation's supply of money. The numbers, 
therefore, must be considered as transient. At any time there is a 
"need" for more money, the ratio can be increased to 20-to-l or 50- 
to-1, or the pretense of a reserve can be dropped altogether. There is 
virtually no limit to the amount of fiat money that can be manufac- 
tured under the present system. 


Because the Federal Reserve can be counted on to "monetize" 
(convert into money) virtually any amount of government debt, and 
because this process of expanding the money supply is the primary 
cause of inflation, it is tempting to jump to the conclusion that fed- 
eral debt and inflation are but two aspects of the same phenomenon. 
This, however, is not necessarily true. It is quite possible to have 
either one without the other. 



The banking cartel holds a monopoly in the manufacture of 
money. Consequently, money is created only when IOUs are 
"monetized" by the Fed or by commercial banks. When private 
individuals, corporations, or institutions purchase government 
bonds, they must use money they have previously earned and 
saved. In other words, no new money is created, because they are 
using funds that are already in existence. Therefore, the sale of gov- 
ernment bonds to the banking system is inflationary, but when sold 
to the private sector, it is not. That is the primary reason the United 
States avoided massive inflation during the 1980s when the federal 
government was going into debt at a greater rate than ever before in 
its history. By keeping interest rates high, these bonds became 
attractive to private investors, including those in other countries. 1 
Very little new money was created, because most of the bonds were 
purchased with American dollars already in existence. This, of 
course, was a temporary fix at best. Today, those bonds are continu- 
ally maturing and are being replaced by still more bonds to include 
the original debt plus accumulated interest. Eventually this process 
must come to an end and, when it does, the Fed will have no choice 
but to literally buy back all the debt of the '80s — that is, to replace all 
of the formerly invested private money with newly manufactured 
fiat money— plus a great deal more to cover the interest. Them we 
will understand the meaning of inflation. 

On the other side of the coin, the Federal Reserve has the option 
of manufacturing money even if the federal government does not go 
deeper into debt. For example, the huge expansion of the money 
supply leading up to the stock market crash in 1929 occurred at a 
time when the national debt was being paid off. In every year from 
1920 through 1930, federal revenue exceeded expenses, and there 
were relatively few government bonds being offered. The massive 
inflation of the money supply was made possible by converting 
commercial bank loans into "reserves" at the Fed's discount win- 
dow and by the Fed's purchase of banker's acceptances, which are 
commercial contracts for the purchase of goods. 

Now the options are even greater. The Monetary Control Act of 
1980 has made it possible for the Creature to monetize virtually any 

1. Only about 11 to 15 per cent of the federal debt at that time was held by the 

Federal Reserve System. 

2- See chapter twenty-three. 


debt instrument, including IOUs from foreign governments. The 
apparent purpose of this legislation is to make it possible to bail out 
those governments which are having trouble paying the interest on 
their loans from American banks. When the Fed creates fiat Ameri- 
can dollars to give foreign governments in exchange for their worth- 
less bonds, the money path is slightly longer and more twisted, but 
the effect is similar to the purchase of U.S. Treasury Bonds. The 
newly created dollars go to the foreign governments, then to the 
American banks where they become cash reserves. Finally, they 
flow back into the U.S. money pool (multiplied by nine) in the form 
of additional loans. The cost of the operation once again is born by 
the American citizen through the loss of purchasing power. Expan- 
sion of the money supply, therefore, and the inflation that follows, 
no longer even require federal deficits. As long as someone is willing 
to borrow American dollars, the cartel will have the option of creat- 
ing those dollars specifically to purchase their bonds and, by so do- 
ing, continue to expand the money supply. 

We must not forget, however, that one of the reasons the Fed 
was created in the first place was to make it possible for Congress to 
spend without the public knowing it was being taxed. Americans 
have shown an amazing indifference to this fleecing, explained 
undoubtedly by their lack of understanding of how the Mandrake 
Mechanism works. Consequently, at the present time, this cozy con- 
tract between the banking cartel and the politicians is in little danger 
of being altered. As a practical matter, therefore, even though the 
Fed may also create fiat money in exchange for commercial debt 
and for bonds of foreign governments, its major concern likely will 
be to continue supplying Congress. 

The implications of this fact are mind boggling. Since our money 
supply, at present at least, is tied to the national debt, to pay off that 
debt would cause money to disappear. Even to seriously reduce it 
would cripple the economy. 1 Therefore, as long as the Federal 
Reserve exists, America will be, must be, in debt. 

The purchase of bonds from other governments is accelerating 
in the present political climate of internationalism. Our own money 

1. With the Fed holding only 7% of the national debt, the effect would still be 
devastating. Since the money supply is pyramided ten times on top of the underly- 
ing government bonds, each $1 eliminated from the federal debt would cause the 
money supply to shrink by 70 cents (1.00 X .07 X 10 = .70). 



supply increasingly is based upon their debt as well as ours, and 
they, too, will not be allowed to pay it off even if they are able. 


It is a sobering thought that the federal government now could 
operate— even at its current level of spending— without levying any 
taxes whatsoever. All it has to do is create the required money 
through the Federal Reserve System by monetizing its own bonds. 
In fact, most of the money it now spends is obtained that way. 

If the idea of eliminating the IRS sounds like good news, remem- 
ber that the inflation that results from monetizing the debt is just as 
much a tax as any other; but, because it is hidden and so few Ameri- 
cans understand how it works, it is more politically popular than a 
tax that is out in the open. 

Inflation can be likened to a game of Monopoly in which the 
game's banker has no limit to the amount of money he can distrib- 
ute. With each throw of the dice he reaches under the table and 
brings up another stack of those paper tokens which all the players 
must use as money. If the banker is also one of the players — and in 
our real world that is exactly the case— obviously he is going to end 
up owning all the property. But, in the meantime, the increasing 
flood of money swirls out from the banker and engulfs the players. 
As the quantity of money becomes greater, the relative worth of 
each token becomes less, and the prices bid for the properties goes 
up. The game is called monopoly for a reason. In the end, one person 
holds all the property and everyone else is bankrupt. But what does 
it matter. It's only a game. 

Unfortunately, it is not a game in the real world. It is our liveli- 
hood, our food, our shelter. It does make a difference if there is only 
one winner, and it makes a big difference if that winner obtained his 
monopoly simply by manufacturing everyone's money. 


Make no mistake about it, inflation is a tax. Furthermore, it is the 
most unfair tax of them all because it falls most heavily upon those 
who are thrifty, those on fixed incomes, and those in the middle and 
lower income brackets. The important point here is that this hidden 
tax would be impossible without fiat money. Fiat money in America 
is created solely as a result of the Federal Reserve System. There- 
fore, it is totally accurate to say that the Federal Reserve System 


generates our most unfair tax. Both the tax and the System that makes 
it possible should be abolished. 

The political scientists who authorize this process of monetizing 
the national debt, and the monetary scientists who carry it out, 
know that it is not true debt. It is not true debt, because no one in 
Washington really expects to repay it— ever. The dual purpose of 
this magic show is simply to create free spending money for the 
politicians, without the inconvenience of raising direct taxes, and 
also to generate a perpetual river of gold flowing into the banking 
cartel. The partnership is merely looking out for itself. 

Why, then, does the federal government bother with taxes at all? 
Why not just operate on monetized debt? The answer is twofold. 
First, if it did, people would begin to wonder about the source of the 
money, and that might cause them to wake up to the reality that 
inflation is a tax. Thus, open taxes at some level serve to perpetuate 
public ignorance which is essential to the success of the scheme. The 
second reason is that taxes, particularly progressive taxes, are weap- 
ons by which elitist social planners can wage war on the middle 


The January 1946 issue oi American Affairs carried an article writ- 
ten by Beardsley Ruml who, at that time, was Chairman of the Fed- 
eral Reserve Bank of New York. Ruml had devised the system of 
automatic withholding during World War II, so he was well quali- 
fied to speak on the nature and purpose of the federal income tax. 
His theme was spelled out in the title of his article: "Taxes for Reve- 
nue Are Obsolete." 

In an introduction to the article, the magazine's editor summa- 
rized Ruml's views as follows: 

His thesis is that, given control of a central banking system and an 
inconvertible currency [a currency not backed by gold], a sovereign 
national government is finally free of money worries and needs no 
longer levy taxes for the purpose of providing itself with revenue. All 
taxation, therefore, should be regarded from the point of view of social 
and economic consequences. 1 

Ruml explained that, since the Federal Reserve now can create 
out of nothing all the money the government could ever want, there 

1. "Taxes for Revenue Are Obsolete," by Beardsley Ruml, American Affairs, 
January, 1946, p. 35. 



remain only two reasons to have taxes at all. The first of these is to 
combat a rise in the general level of prices. His argument was that, 
when people have money in their pockets, they will spend it for 
goods and services, and this will bid up the prices. The solution, he 
says, is to take the money away from them through taxation and let 
the government spend it instead. This, too, will bid up prices, but 
Ruml chose not to go into that. He explained his theory this way: 

The dollars the government spends become purchasing power in 
the hands of the people who have received them The dollars the 
government takes by taxes cannot be spent by the people, and 
therefore, these dollars can no longer be used to acquire the things 
which are available for sale. Taxation is, therefore, an instrument of the 
first importance in the ao!ministration of any fiscal and monetary 


The other purpose of taxation, according to Ruml, is to redistrib- 
ute the wealth from one class of citizens to another. This must 
always be done in the name of social justice or equality, but the real 
objective is to override the free market and bring society under the 
control of the master planners. Ruml said: 

The second principle purpose of federal taxes is to attain more 
equality of wealth and of income than would result from economic 
forces working alone. The taxes which are effective for this purpose 
are the progressive individual income tax, the progressive estate tax 
and the gift tax. What these taxes should be depends on public policy 
with respect to the distribution of wealth and of income. These taxes 
should be defended and attacked in terms of their effect on the 
character of American life, not as revenue measures. 2 

As we have seen, Senator Nelson Aldrich was one of the creators 
of the Federal Reserve System. That is not surprising in light of the 
cartel nature of the System and the financial interests which he rep- 
resented. Aldrich also was one of the prime sponsors of the federal 
income tax. The two creations work together as a far more delicate 
mechanism for control over the economic and social life of society 
than either one alone. 

In more recent years, there has been hopeful evidence that the 
master planners were about to abandon Ruml's blueprint. We have 

1- Ruml, p. 36. 

2 - Ibid., p. 36. 


heard a great deal both in Congress and at the Federal Reserve 
about the necessity of reducing expenses so as to diminisn the 
growth of federal debt and inflation. But it has been lip service only. 
The great bulk of federal funding continues to be created by the 
Mandrake Mechanism, the cost of government continues to outpace 
tax revenues, and the Ruml formula reigns supreme. 


While it is true that the Mandrake Mechanism is responsible for 
the expansion of the money supply, the process also works in 
reverse. Just as money is created when the Federal Reserve purchases 
bonds or other debt instruments, it is extinguished by the sale of 
those same items. When they are sold, the money is given back to 
the System and disappears into the inkwell or computer chip from 
which it came. Then, the same secondary ripple effect that created 
money through the commercial banking system causes it to be with- 
drawn from the economy. Furthermore, even if the Federal Reserve 
does not deliberately contract the money supply, the same result 
can and often does occur when the public decides to resist the avail- 
ability of credit and reduce its debt. A man can only be tempted to 
borrow, he cannot be forced to do so. 

There are many psychological factors involved in a decision to 
go into debt that can offset the easy availability of money and a low 
interest rate: A downturn in the economy, the threat of civil disor- 
der, the fear of pending war, an uncertain political climate, to name 
just a few. Even though the Fed may try to pump money into the 
economy by making it abundantly available, the public can thwart 
that move simply by saying no, thank you. When this happens, the 
old debts that are being paid off are not replaced by new ones to 
take their place, and the entire amount of consumer and business 
debt will shrink. That means the money supply also will shrink, 
because, in modern America, debt is money. And it is this very 
expansion and contraction of the monetary pool — a phenomenon 
that could not occur if based upon the laws of supply and 
demand— that is at the very core of practically every boom and bust 
that has plagued mankind throughout history. 

In conclusion, it can be said that modern money is a grand illu- 
sion conjured by the magicians of finance and politics. We are living 
in an age of fiat money, and it is sobering to realize that every pre- 
vious nation in history that has adopted such money eventually was 



economically destroyed by it. Furthermore, there is nothing in our 
present monetary structure that offers any assurance that we may 
be exempted from that morbid roll call. 

Correction. There is one. It is still within the power of Congress 
to abolish the Federal Reserve System. 


The American dollar has no intrinsic value. It is a classic exam- 
ple of fiat money with no limit to the quantity that can be produced. 
Its primary value lies in the willingness of people to accept it and, to 
that end, legal tender laws require them to do so. It is true that our 
money is created out of nothing, but it is more accurate to say that it 
is based upon debt. In one sense, therefore, our money is created out 
of less than nothing. The entire money supply would vanish into 
bank vaults and computer chips if all debts were repaid. Under the 
present System, therefore, our leaders cannot allow a serious reduc- 
tion in either the national or consumer debt. Charging interest on 
pretended loans is usury, and that has become institutionalized 
under the Federal Reserve System. The Mandrake Mechanism by 
which the Fed converts debt into money may seem complicated at 
first, but it is simple if one remembers that the process is not 
intended to be logical but to confuse and deceive. The end product 
of the Mechanism is artificial expansion of the money supply, which 
is the root cause of the hidden tax called inflation. This expansion 
then leads to contraction and, together, they produce the destructive 
boom-bust cycle that has plagued mankind throughout history 
wherever fiat money has existed. 

Cecil Rhodes made one of the 
world's greatest fortunes of the 18th 
century. Financed by Nathan 
Rothschild and the Bank of England, 
he established a monopoly over the 
diamond output of South Africa and 
most of the gold as well. He formed 
a secret society which included 
many of the top leaders of British 
government. Their elitist goal was 
nothing less than world domination 
and the establishment of a modern 
feudalist society controlled by 
themselves through the world's 
central banks. In America, the 
Council on Foreign Relations (CFR) 
was an outgrowth of that group. 

August Belmont came to New York 
in 1837 as the financial agent of the 
Rothschilds. He funneled vast 
amounts of capital into American 
investments, often without anyone 
knowing whose money he was 
spending. The purpose of 
concealment was to blunt the 
growing anti-Rothschild resentment 
that was then prevalent in Europe 
as well as America. When his 
affiliation became commonly know 
his usefulness came to an end and 
he was replaced by J. P. Morgan 

J-P. Morgan, Sr. (left) was brought into banking by his father, Junius Morgan, in 
England. The Morgans were friendly competitors with the Rothschilds and became 
socially close to them. Morgan's London-based firm was saved from financial ruin in 
1857 by the Bank of England over which the Rothschilds held great influence. 
Thereafter, Morgan appears to have served as a Rothschild financial agent and went 

to great length to appeartotally American. 
John D. Rockefeller (right) made his initial fortune in oil but soon gravitated into 
banking and finance. His entry into the field was not welcomed by Morgan, and they 
became fierce competitors. Eventually, they decided to minimize their competition by 

entering into joint ventures. In the end, they worked together to create a national 
banking cartel called the Federal Reserve System. 

Above is the clubhouse for the 
private resort on Jekyll Island in 
Georgia where the Federal Reserve 
System was conceived in great 
secrecy in 1910. It is shown here 
shortly after completion. 

Jacob Schiff (right) was head of the 
New York investment firm, Kuhn, 
Loeb & Co. He was one of the 
principal backers of the Bolshevik 
revolution and personally financed 
Trotsky's trip from New York to 
Russia. He was a major contributor to 
Woodrow Wilson's presidential 
campaign and an advocate for 
passage of the Federal Reserve Act. 


This cartoon by Robert Minor appeared in the St. Louis Post-Dispatch in 
1911 - It shows Karl Marx surrounded by enthusiastic Wall Street financiers: 
Morgan partner George Perkins; J. P. Morgan; John Ryan of National City 
Bank; John D. Rockefeller; and Andrew Carnegie. Immediately behind 
Marx is Teddy Roosevelt, leader of the Progressive Party. 

Harry Dexter White (left) and 
John Maynard Keynes (right) 
were the theoreticians who 
guided the 1944 Bretton Woods 
Monetary Conference at which 
the IMF/World Bank was 
created. White was a member of 
the Communist Party. Keynes 
was a member of the Fabian 
Society. They shared the same 
goal of international socialism. 

The IMF/World Bank has 
furthered that goal ever since. 

Raymond Robins is shown here as 
the Chairman of the Progressive Party' 
convention in Chicago in 1912. He 
later became head of the American 
Red Cross Mission in Russia after the 
Bolshevik revolution. Although he 
represented Wall Street interests, he 
was a disciple of Cecil Rhodes and 
was anti-capitalist in his beliefs. He 
held great influence over Lenin. 

Edward Mandell House was the 
man who secured Wood row 
Wilson's nomination for 
President and who, thereafter, 
became the hidden power at the 

I White House. He negotiated a 
secret agreement to draw the 
U.S. into World War I at the very 
time Wilson was campaigning 
on the promise to keep America 
out of the war. On behalf of Wall 
Street, House lobbied Congress 

I to pass the Federal Reserve Act. 

National Archives 

Cgrroll Quigiey was a professor of 
history at Georgetown University. His 
book, Tragedy and Hope, revealed 
<ret the Council on Foreign Relations 
(CFR) is an outgrowth of the secret 
society formed by Cecil Rhodes. 

He wrote the history of how an 
international network of financiers 
has created a system of financial 
control able to dominate the political 
systems of all countries through their 
tra ' banks. He named names and 
Provided meticulous documentation. 
His book was suppressed. 

Winston Churchill was the First Lord of the 
Admiralty in World War I. As the Lusitania, 
entered into an area where a German 
U-Boat was known to be operating, he 
called off the destroyer escort that had beer, 
assigned to protect her. He calculated that 
the destruction of a British ship with U.S. 
passengers aboard would inflame American 
passions against Germany and help create a 
political climate for coming into the war. 

Hulton Deutsch 

U.S. Armv Pictoral Service 

Lord Mersey (right) was put in charge of 
an official inquiry into the sinking of the 
Lusitania. It was not an investigation but a 
coverup. He was instructed by the 
Admiralty to place the entire blame on the 
Captain of the ship. Mersey obeyed his 
orders but refused payment for his 
services and declined to accept further 
judicial assignments. In later years, he 
said the affair "was a damn dirty business." 

Section III 


The ancient alchemists sought in vain to convert 
lead into gold. Modern alchemists have 
succeeded in that quest. The lead bullets of war 
have yielded an endless source of gold for those 
magicians who control the Mandrake 
Mechanism. The startling fact emerges that, 
without the ability to create fiat money, most 
modern wars simply would not have occurred. 
As long as the Mechanism is allowed to function, 
future wars are inevitable. This is the story of how 
that came to pass. 

Chapter Eleven 


The rise of the House of Rothschild in Europe; the 
tradition among financiers of profiting from both 
sides of armed conflict; the formula by which war 
is converted into debt and debt converted back 
into war. 

So far we have adhered closely to the subject of money and the 
history of its manipulation by political and monetary scientists. 
Now we are going to take a short detour along a parallel path and 
view some of the same historical scenery from a different perspec- 
tive. As we progress, it may seem that we have lost our way, and 
you may wonder what connection any of this can possibly have 
with the Federal Reserve System. Please be assured, however, it has 
everything to do with it, and, when we finally return to that topic, 
the connection will have become painfully clear. 


The focus of this chapter is on the profits of war and, more 
specifically, the tendency of those who reap those profits to 
manipulate governments into military conflicts, not for national or 
patriotic reasons, but for private gain. The mechanism by which 
this was accomplished in the past was more complex than simply 
lending money to warring governments and then collecting inter- 
est, although that was part of it. The real payoff has always been in 
the form of political favoritism in the market place. Writing in the 
year 1937, French historian Richard Lewinsohn explains: 

Although often called bankers, those who financed wars in the 
pre-capitalist period ... were not bankers in the modem sense of the 
word. Unlike modern bankers who operate with money deposited 
with them by their clients [or, in more recent times, created out of 
nothing by a central bank— E.G.], they generally worked with the 
fortune which they themselves had amassed or inherited, and which 


they lent at a high rate of interest. Thus those who risked the financing 
of a war were for the most part already very rich, and this was the case 
down to the seventeenth century. 

When they agreed to finance a war, these rich lenders did not, 
however, always attach great importance to the rate of interest In this 
respect they often showed the greatest compliance to their august 
clients. But in return they secured for themselves privileges which 
could be turned into industrial or commercial profit, such as mining 
concessions, monopolies of sale or importation, etc. Sometimes even 
they were given the right to appropriate certain taxes as a guarantee of 
their loans. So though the loan itself carried a very real risk and often 
did not bring in much interest, the indirect profits were very 
considerable, and the lenders' leniency well rewarded. 


No discussion of banking as a mechanism for financing wars 
would be complete without turning eventually to the name 
Rothschild. It was Mayer Amschel Rothschild who is quoted as 
saying: "Let me issue and control a nation's money and I care not 
who writes the laws." 2 Biographer Frederic Morton concluded that 
the Rothschild dynasty had: "...conquered the world more thor- 
oughly, more cunningly, and much more lastingly than all the 
Ceasars before or all the Hitlers after them." 3 The dynasty was 
begun in Frankfurt, Germany, in the middle of the eighteenth 
century by Mayer Amschel Bauer, the son of a goldsmith. Mayer 
became a clerk in the Oppenheimer Bank in Hanover and was 
eventually promoted to junior partner. After his father's death, he 
returned to his home in Frankfurt to continue the family business. 
Over the door hung a red shield with an eagle as a sign to identify 
the establishment. The German words for red shield are roth schild, 
so he changed his name from Bauer to Rothschild and added five 
gold arrows held in the talons of the eagle to represent his five sons. 

1. Richard Lewinsohn, The Profits of War through the Ages (New York: E.P. Dutton, 
1937), pp. 55-56. 

2. Quoted by Senator Robert L. Owen, former Chairman of the Senate Committee 
on Banking and Currency and one of the sponsors of the Federal Reserve Act, 
National Economy and the Banking System, (Washington, D.C.: U.S. Government 
Printing Office, 1939), p. 99. This quotation could not be verified in a primary 
reference work. However, when one considers the life and accomplishments of the 
elder Rothschild, there can be little doubt that this sentiment was, in fact, his 
outlook and guiding principle. 

3. Frederic Morton, The Rothschilds: A Family Portrait (New York: Atheneum, 1962), 
p. 14. 



The Rothschild fortune began when Mayer adopted the practice 
of fractional-reserve banking. As we have seen, he was not alone in 
this, but the House of Rothschild greatly surpassed the competi- 
tion. That was due to his sharp business acumen and also because 
of his five most unusual sons, all of whom became financial power 
centers of their own. As they matured and learned the magic of 
converting debt into money, they moved beyond the confines of 
Frankfurt and established additional operations in the financial 
centers, not only of Europe, but of much of the civilized world. 

Throughout the first half of the nineteenth century, the brothers 
conducted important transactions on behalf of the governments of 
England, France, Prussia, Austria, Belgium, Spain, Naples, 
Portugal, Brazil, various German states, and other smaller coun- 
tries. They were the personal bankers of many of the crowned 
heads of Europe. They made large investments, through agents, in 
markets as distant as the United States, India, Cuba, and Australia. 
They were financiers to Cecil Rhodes, making it possible for him to 
establish a monopoly over the diamond fields of South Africa. They 
are still connected with the de Beers. 1 

Biographer Derek Wilson writes: 

Those who lampooned or vilified the Rothschilds for their 
"sinister" influence had a considerable amount of justification for their 
anger and anxiety. The banking community had always constituted a 
"fifth estate" whose members were able, by their control of royal purse 
strings, to affect important events. But the house of Rothschild was 
immensely more powerful than any financial empire that had ever 
preceded it. It commanded vast wealth. It was international. It was 
independent. Royal governments were nervous of it because they 
could not control it. Popular movements hated it because it was not 
answerable to the people. Constitutionalists resented it because its 
influence was exercised behind the scenes — secretly. 2 

Secrecy, of course, is essential for the success of a cabal, and the 
Rothschilds perfected the art. By remaining behind the scenes, they 
were able to avoid the brunt of public anger which was directed, 
instead, at the political figures which they largely controlled. This is 
a technique which has been practiced by financial manipulators 

1 Morton, pp. 145, 219. 

2 Derek Wilson, Rothschild: The Wealth and Power of A Dynasty (New York: Charles 
Scribner's Sons, 1988), pp. 79, 98-99. 


ever since, and it is fully utilized by those who operate the Federal 
Reserve System today. Wilson continues: 

Gandestinity was and remained a feature of Rothschild political 
activity. Seldom were they to be seen engaging in open public debate 
on important issues. Never did they seek government office. Even 
when, in later years, some of them entered parliament, they did not 
feature prominently in the assembly chambers of London, Paris or 
Berlin. Yet all the while they were helping to shape the major events of 
the day: by granting or withholding funds; by providing statesmen 
with an official diplomatic service; by influencing appointments to 
high office; and by an almost daily intercourse with the great decision 
makers. 1 


Continual war in Europe created excellent opportunities for 
profit from smuggling scarce consumer goods past military block- 
ades. Since the Rothschilds often financed both sides in a conflict 
and were known to have great political influence, the mere sight of 
the red shield on a leather pouch, a carriage, or a ship's flag was 
sufficient to insure that the messenger or his cargo could pass 
through check points in either direction. This immunity allowed 
them to deal in a thriving black market for cotton goods, yam, 
tobacco, coffee, sugar, and indigo; and they moved freely through 
the borders of Germany, Scandinavia, Holland, Spain, England, 
and France. 2 This government protection was one of those indirect 
benefits that generated commercial profits far in excess of the 
interest received on the underlying government loans. 

It is generally true that, one man's loss is another man's gain. 
And even the friendliest of biographers admit that, for more than 
two centuries, the House of Rothschild profited handsomely from 
wars and economic collapses, the very occasions on which others 
sustained the greatest losses. 


If one picture is worth a thousand words, then one example 
surely must be worth a dozen explanations. There is no better 
example than the economic war waged by the financiers 


nineteenth-century Europe against Napoleon Bonaparte. It is an 
easily forgotten fact of history that Napoleon had restored law and 

1. Derek Wilson, p. 99. 

2. Morton, pp. 40-41. 



order to a chaotic, post-revolutionary France and had turned his 
attention, not to war, but to establishing peace and improving 
economic conditions at home. He was particularly anxious to get 
his country and his people out of debt and out of the control of 
bankers. R. McNair Wilson, in Monarchy or Money Pozver, says: 

It was ordained by him that money should not be exported from 
France on any pretext whatever except with the consent of the 
Government, and that in no circumstance should loans be employed to 
meet current expenditure whether civil or military.... "One has only to 
consider," Napoleon remarked, "what loans can lead to in order to 
realize their danger. Therefore, I would never have anything to do 
with them and have always striven against them."... 

The object was to withhold from finance the power to embarrass 
the Government as it had embarrassed the Government of Louis XVI. 
When a Government, Bonaparte declared, is dependent for money 
upon bankers, they and not the leaders of that Government control the 
situation, since "the hand that gives is above the hand that takes."... 

"Money," he declared, "has no motherland; financiers are without 
patriotism and without decency: their sole object is gain." 1 

One of Napoleon's first blows against the bankers was to 
establish an independent Bank of France with himself as president. 
But even this bank was not trusted, and government funds were 
never placed into it. It was his refusal to borrow, however, that 
caused the most concern among the financiers. Actually, to them 
this was a mixture of both bad and good news. The bad news was 
that they were denied the benefit of royalty payments on fractional 
money. The good news was that, without resorting to debt, they 
were confident Napoleon could not militarily defend himself. Thus, 
he easily could be toppled and replaced by Louis XVI of the old 
monarchic dynasty who was receptive to banker influence. Wilson 

They had good hope of compassing his downfall. None believed 
that he could finance war on a great scale now that the resource of 
paper money had been denied him by the destruction of the Assignat. 
Where would he obtain the indispensable gold and silver to feed and 
equip a great army? Pitt [the Prime Minister of England] counted 
already on a coalition of England, Austria, Prussia, Russia, Spain, 

1. R. McNair Wilson, Monarchy or Money Power (London: Eyre and Spottiswoode, 
Ltd., 1933), pp. 68,72. 

2. The Assignat was pure fiat money which rapidly became totally worthless in 
commerce and which all but destroyed the French economy. 


Sweden, and numerous small states. Some 600,000 men would be put 
into the field. All the resources of England's wealth — that is to say, of 
the world's wealth — would be placed at the disposal of this 
overwhelming force. Could the Corsican muster 200,000? Could he 
arm them? Could he feed them? If the lead bullets did not destroy him, 
the gold bullets would soon make an end. He would be forced, like his 
neighbors, to come, hat in hand, for loans and, like them, to accept the 
banker's terms.... 

He could not put his hands on £2,000,000, so empty was the 
Treasury and so depleted the nation's stock of metallic money. 
London waited with interest to see how the puzzle would be solved. 1 

Napoleon solved the puzzle quite simply by selling off some 
real estate. Those crazy Americans gave him £3,000,000 for a vast 
swamp called Louisiana. 


Napoleon did not want war, but he knew that Europe's 
financial rulers would not settle for peace — unless, of course, they 
were forced into it by the defeat of their puppet regimes or unless, 
somehow, it would be to their monetary advantage. It was in 
pursuit of the latter tactic that he threatened to take direct posses- 
sion of Holland, which then was ruled by his brother, King Louis. 
Napoleon knew that the Dutch were heavily in debt to the English 
bankers. If Holland were to be annexed by France, this debt would 
never be repaid. So Napoleon made a proposal to England's 
bankers that, if they would convince the English government to 
accept peace with France, he would agree to leave Holland alone. 

The negotiations were handled by the banker, Pierre-Cesar 
Labouchere, who was sent by the Dutch, and the English banker, 
Sir Francis Baring who was Labouchere's father-in-law. Although 
this was an attractive proposal to the bankers, at least on a 
short-term basis, it was still against their nature to forego the 
immense profits of war and mercantilism. They revised the pro- 
posal, therefore, to include a plan whereby both England and 
France would combine forces to destroy the newly independent 
United States and bring at least half of it— the industrial half— back 
under the domination of England. The incredible plan, conceived 
by the French banker, Ouvard, called for military invasion and 
conquest followed by division of the spoils. England would receive 

1. R. McNair Wilson, pp. 71-72. 



the northern states, united with Canada, while the southern states 
would fall to France. Napoleon was to be tempted by offering him 
the awesome title of "King of America." McNair Wilson tells us: 

Labouchere wrote to Baring on March 21, and enclosed a note for 
[British Foreign Secretary] Wellesley dictated by Ouvrard which ran: 

"From a conqueror he (Napoleon) is becoming a preserver; the 
first result of his marriage with Marie Louise will be that he will make 
an offer of peace to England. It is to this nation's (i.e., England's) 
interest to make peace, for it has the command of the sea; on the 
contrary, it is really in the interest of France to continue war, which 
allows her to expand indefinitely and make a fresh fleet, which cannot 
be done once peace is established. Why does not the English Cabinet 
make a proposal to France to destroy the United States of America, 
and by making them again dependent on England, persuade 
Napoleon to lend his aid to destroy the life-work of Louis XVI?... It is 
to her (England's) interest to conclude peace and to flatter Napoleon's 
vanity by recognizing his work and his imperial title."... 

The Cabinet discussed the proposals and approved them. 
Wellesley at once hurried to Baring's house to give him the good 
news.... The Dutch would be able to pay and would be compelled to 
pay in gold. 

Unhappily Napoleon found out what was afoot and took 
somewhat strong objections to the plan of a joint attack on the United 
States. He arrested Ouvrard, dismissed and exiled Fouche, and 
published the whole story, to the grave distress of Wellesley and 

It must not be concluded from this that Napoleon was a 
paragon of virtue or a champion of honest money. His objection to 
the bankers was that their monetary power was able to threaten the 
sovereignty of his own political power. He allowed them a free 
hand while they served the purpose of the state. Then, when the 
need for military financing subsided, he would condemn them for 
making "unholy profits" and simply take it from them in the name 
of the people. If the bankers protested, they were sent to prison. 

And so the battle lines were drawn. Napoleon had to be 
destroyed at all costs. To make this possible, the Bank of England 
created vast new amounts of fiat money to "lend" to the govern- 
ment so it could finance an overpowering army. A steady stream of 
gold flowed out of the country to finance the armies of Russia, 
Prussia, and Austria. The economy staggered once again under the 

1. R. McNair Wilson, pp. 81-82. 


load of war debt, and the little people paid the bill with hardly a 
grumble because they hadn't the slightest knowledge it was being 
charged to their account. Wilson concludes the story: 

The bankers won. Louis XVIII was restored by British arms and 
British diplomacy to the throne of his ancestors. Loans were placed at 
his disposal, though Napoleon had left a France which enjoyed a credit 

A year later the man whom every King and every banker in 
Europe called "usurper" won back his throne with 800 men and 
without the firing of a single shot. On this occasion he had no option 
but to raise a loan for the defense of France. The City of London 
[banking district] accommodated him with £5,000,000. With this sum 
he equipped the army which Wellington defeated at Waterloo. 


One of the most fascinating and revealing episodes to be 
recorded by Rothschild biographers concerns the smuggling of a 
large shipment of gold to finance the Duke of Wellington who was 
attempting to feed and equip an army in Portugal and in the 
Pyrenees mountains between Spain and France. 

It was not at all certain that Wellington would be able to defeat 
Napoleon in the coming battle, and the Duke was hard pressed to 
convince bankers and merchants in Portugal and Spain to accept 
his written promises-to-pay, even though they were officially 
guaranteed by the British government. These notes were deeply 
discounted, and Wellington was desperate for gold coin. It was at 
this point that Nathan Rothschild offered the services of himself 
and his brothers. With an efficient smuggling apparatus already 
functioning throughout Europe, he was able to offer Wellington 
much better terms while still making a magnificent profit. But, to 
accomplish this, the gold had to pass right under Napoleon's nose. 
Frederic Morton describes the scene: 

There was only one way to route the cash: through the very France 
England's army was fighting. Of course, the Rothschild 
blockade-running machine already had superb cogs whirring all over 
Germany, Scandinavia and England, even in Spain and Southern 
France. But a very foxy new wheel was needed in Napoleon's capital 
itself. Enter Jacob — henceforth called James — the youngest of Mayer's 
sons. 2 

1. R. McNair Wilson, p. 83. 

2. Morton, p. 46. 



James was only nineteen years old but was well trained by his 
father in the art of deception. He arrived in Paris with a dual 
mission. First, he was to provide the French authorities with a false 
report about the British gold movement, with just enough truth in it 
to sound convincing. He presented the government with falsified 
letters indicating that the English were desperate to halt the flow of 
their gold into France. The ploy paid off when the French authori- 
ties then actually encouraged the financial community to accept 
British gold and to convert it into commercially sound banknotes. 
Second, James was to serve as a vital link in a financial chain 
stretching between London and the Pyrenees. He was to coordinate 
the receipt of the gold into France, the conversion of that gold into 
Spanish banknotes, and the movement of those notes out of the 
country on their way to Wellington. All of this he did with amazing 
dexterity, especially considering his youth. Morton concludes: 

In the space of a few hundred hours Mayer's youngest had not 
only gotten the English gold rolling through France, but conjured a 
fiscal mirage that took in Napoleon himself. A teen-age Rothschild 
tricked the imperial government into sanctioning the very process that 
helped to ruin it.... 

The family machine began to hum. Nathan sent big shipments of 
British guineas, Portuguese gold ounces, French napoleons d'or (often 
freshly minted in London) across the Channel. From the coast James 
saw them to Paris and secretly transmuted the metal into bills on 
certain Spanish bankers. South of the capital, Kalmann [another of 
Mayer's sons] materialized, took over the bills, blurred into a 
thousand shadowed canyons along the Pyrenees — and reappeared, 
with Wellington's receipts in hand. Salomon [another son] was 
everywhere, trouble-shooting, making sure the transit points were 
diffuse and obscure enough not to disturb either the French delusion 
or the British guinea rate. Amschel stayed in Frankfurt and helped 
father Mayer to staff headquarters. 

The French did catch a few whiffs of the truth. Sometimes the 
suspicious could be prosperously purged of their suspicion. The police 
chief of Calais, for example, suddenly was able to live in such 
distracting luxury that he found it difficult to patrol the shoreline 

While Napoleon struggled his might away in the Russian Winter, 
there passed through France itself a gold vein to the army staving in 
the Empire's back door. 1 

1. Morton, p. 47. 



At a dinner party in later years, Nathan casually summed up 
the episode as though it were merely a good piece of routine 
business. He said: 

The East India Company had £800,000 worth of gold to sell. I went 
to the sale and bought it all. I knew the Duke of Wellington must have 
it. The government sent for me and said they must have the gold. I sold 
the gold to them, but they didn't know how to get it to the Duke in 
Portugal. I undertook all that and sent it through France. It was the 
best business I have ever done. 1 


The final outcome of the battle at Waterloo between Wellington 
and Napoleon was crucial to Europe both politically and economi- 
cally. If Napoleon had been victorious, England would have been 
in even greater economic trouble than before. Not only would she 
have lost international power and prestige, but even at home, her 
subjects would have been further disgruntled over such great 
personal and financial wartime sacrifices. Her defeat almost surely 
would have resulted in not being able to repay the great amounts 
she had borrowed to conduct the war. In the London stock 
exchange, therefore, where British government bonds were traded 
along with other securities, everyone waited anxiously for news of 
the outcome. 

It was well known that the Rothschilds had developed a private 
courier service that was used, not only to transport gold and other 
tangible cargo, but to rapidly move information that could be useful 
in making investment decisions. It was expected, therefore, that 
Nathan in London would be the first to know the name of the victor 
after the cannon smoke had cleared from the battlefield. And they 
were not to be disappointed. The first news of Wellington's victory 
arrived in Brussels around midnight on June 18, 1815, where a 
Rothschild agent named Rothworth was waiting in readiness. He 
immediately mounted a fresh horse and set off for the port of 
Ostend where a boat was standing by to speed him across the 
channel to London. In the early hours of June 20, the exhausted 
messenger was pounding on Nathan's door, a full twenty-four 
hours before Wellington's own courier, Major Henry Percy, 

1. Morton, p. 45. 



At least one friendly biographer claims that Nathan's first act 
was to deliver the news to the Prime Minister, but that government 
officials were hesitant at first to believe it, because it ran contrary to 
reports they had received previously telling of serious British 
setbacks. At any rate, there is no doubt that Nathan's second act of 
the morning was to set off for the stock exchange to take up a 
position at his usual pillar. 

All eyes were upon him as he slumped dejectedly, staring at the 
floor. Then, he raised his gaze and, with pained expression, began 
to sell. The whisper went through the crowded room, "Nathan is 
selling?" "Nathan is sellingl" "Wellington must have lost." "Our 
government bonds will neverbe repaid." "Sell them now. Sell. Sell!" 

Prices tumbled, and Nathan sold again. Prices plummeted, and 
still Nathan sold. Finally, prices collapsed altogether and, in one 
quick move, Nathan reversed his call and purchased the entire 
market in government bonds. In a matter of just a few hours, he 
had acquired the dominant holding of England's entire debt at but 
a tiny fraction of its worth. 1 


Benjamin Disraeli, the Prime Minister of England, wrote a book 
in 1844 called Coningsby. It was a political novel in which the author 
expressed his views about contemporary issues. One of the strong 
characters in the book was a financier named Sidonia, but every 
detail of Sidonia' s actions was an exact replica of the real Lord 
Rothschild, whom Disraeli greatly admired. In the guise of a novel, 
we read about Rothschild's emigration from Germany, his family 
and banking ties throughout Europe, his handling of the gold for 
Wellington, and his financial coup after Waterloo. Then Disraeli 

Europe did require money, and Sidonia was ready to lend it to 
Europe. France wanted some; Austria more; Prussia a little; Russia a 
few millions. Sidonia could furnish them all.... 

It is not difficult to conceive that, after having pursued the career 
we have intimated for about ten years, Sidonia had become one of the 

The New York Times, i n its April 1, 1915, edition, reported that Baron Nathan 
Mayer de Rothschild had attempted to secure a court order to suppress a book 
written by Ignatious Balla entitled The Romance of the Rothschilds on the grounds that 
me Waterloo story about his grandfather was untrue and libelous. The court ruled 
( Jhjl^he story was true, dismissed the suit, and ordered Rothschild to pay all court 


most considerable personages in Europe. He had established a 
brother, or a near relative, in whom he could confide, in most Df the 
principal capitals. He was lord and master of the money market of the 
world, and of course virtually lord and master of everything else. He 
literally held the revenues of Southern Italy in pawn; and monarchs 
and ministers of all countries courted his advice and were guided by 
his suggestions. 1 

That Disraeli was not exaggerating was made clear by the boast 
of James Rothschild himself. When U.S. Treasury agents ap- 
proached him in Paris in 1842 with a request for a loan to the 
American government, he said to them: "You have seen the man 
who is at the head of the finances of Europe." 2 

There have always been men who were in a position to make 
private fortunes out of cooperating with both sides in a war. The 
Rothschilds were not unique in this, but they no doubt perfected 
the art and became the personification of that breed. They were not 
necessarily evil in a moral sense. What preoccupied their minds 
were not questions of right or wrong but of profit and loss. This 
analytical indifference to human suffering was aptly described by 
one Rothschild when he sjtid: "When the streets of Paris are 

running with blood, I buy." They may have held citizenship in the 
country of their residence, but patriotism was beyond their com- 
prehension. They were also very bright, if not cunning, and these 
combined traits made them the role model of the cool pragmatists 
who dominate the political and financial world of today. Disraeli 
well described this type when he wrote of Sidonia: 

He was a man without affections. It would be harsh to say he had 
no heart, for he was susceptible of deep emotions, but not for 
individuals.... The individual never touched him. Woman was to him 
a toy, man a machine. 4 

It would seem that an absence of patriotism and a cold, 
analytical outlook would lead financiers to avoid making loans to 
governments, particularly foreign ones. Private borrowers can be 
hauled into court and their assets confiscated to make good on their 

1. Benjamin Disraeli, Coningsby (New York: Alfred A. Knopf, originally published 
in England in 1844), p. 225. 

2. Stephen Birmingham, "Our Crowd": The Great Jewish Families of New York (New 
York: Harper & Row, 1986), p. 73. 

3. Quoted in The Neiv York Times, October 21,1987, cited by Chernow, p. 13. 

4. Disraeli, p. 229. 



debts. But governments control the legalized use of force. They are 
the courts. They are the police. Who will seize their assets? The 
answer is another government. Speaking of a relatively modern 
example of this principle, Ron Chernow explains: 

The new alliance [between the monetary and political scientists] 
was mutually advantageous. Washington wanted to harness the new 
financial power to coerce foreign governments into opening their 
markets to American goods or adopting pro-American policies. The 
banks, in turn, needed levers to force debt repayment and welcomed 
the government's police powers in distant places. The threat of 
military intervention was an excellent means by which to speed loan 
repayment. When Kuhn, Loeb considered a loan to the Dominican 
Republic, backed by customs receipts, Jacob Schiff inquired of his 
London associate Sir Ernest Cassel, "If they do not pay, who will 
collect these customs duties?" Cassel replied, "Your marines and 
ours." 1 

One of the great puzzles of history is why governments always 
go into debt and seldom attempt to put themselves on a "pay-as- 
you-go" basis. A partial answer is that kings and politicians lack 
the courage to tax their subjects the enormous sums that would be 
required under such an arrangement. There is also the deeper 
question of why the expenditures are so high in the first place. 

Given the mentality of the world's financial lords and masters, 
as Disraeli described them, it is conceivable that a coldly calculated 
strategy has been developed over the years to insure this result. In 
fact, the historical evidence strongly suggests that just such a plan 
was developed in eighteenth-century Europe and perfected in 
twentieth-century America. For the purposes of hypothetical analy- 
sis, let us identify this strategy as The Rothschild Formula. 


Let us imagine a man who is totally pragmatic. He is smarter 
and more cunning than most men and, in fact, holds them in thinly 
disguised contempt. He may respect the talents of a few, but has 
little concern over the condition of mankind. He has observed that 
kings and politicians are always fighting over something or other 
and has concluded that wars are inevitable. He also has learned 
that wars can be profitable, not only by lending or creating the 

1- Quoted by Jacques Attali, translated by Barbara Ellis, A Man of Influence- Sir 
biegmund Warburg, 1902-82 (London: Weidenfeld, & Nicolson, 1986), p. 57. 


money to finance them, but from government favoritism in the 
granting of commercial subsidies or monopolies. He is not capable 
of such a primitive feeling as patriotism, so he is free to participate 
in the funding of any side in any conflict, limited only by factors of 
self interest. If such a man were to survey the world around him, it 
is not difficult to imagine that he would come to the following 
conclusions which would become the prime directives of his career: 

1. War is the ultimate discipline to any government. If it can 

successfully meet the challenge of war, it will survive. If tt 
cannot, it will perish. All else is secondary. The sanctity of its 
laws, the prosperity of its citizens, and the solvency of its 
treasury will be quickly sacrificed by any government in its 
primal act of self-survival. 

2. All that is necessary, therefore, to insure that a government will 

maintain or expand its debt is to involve it in war or the threat of 
war. The greater the threat and the more destructive the war, the 
greater the need for debt. 

3. To involve a country in war or the threat of war, it will be 

necessary for it to have enemies with credible military might. If 
such enemies already exist, all the better. If they exist but lack 
military strength, it will be necessary to provide them the 
money to build their war machine. If an enemy does not exist at 
all, then it will be necessary to create one by financing the rise of 
a hostile regime. x 

4. The ultimate obstacle is a government which declines to finance 

its wars through debt. Although this seldom happens, when it 
does, it will be necessary to encourage internal political 
opposition, insurrection, or revolution to replace that 
government with one that is more compliant to our will. The 
assassination of heads of state could play an important role in 
this process. 

5. No nation can be allowed to remain militarily stronger than its 

adversaries, for that could lead to peace and a reduction of debt. 
To accomplish this balance of power, it may be necessary to 
finance both sides of the conflict. Unless one of the combatants 
is hostile to our interests and, therefore, must be destroyed, 
neither side should be allowed a decisive victory or defeat. 
While we must always proclaim the virtues of peace, the 
unspoken objective is perpetual war. 



Whether anyone actually put this strategy into words or passed 
it along from generation to generation is not important. In fact, it is 
doubtful it has ever worked that way. Whether it is the product of 
conscious planning or merely the consequence of men responding 
to the profit opportunities inherent in fiat money, the world's 
financial lords have acted as though they were following such a 
plan, and this has become especially apparent since the creation of 
the central-bank Mandrake Mechanism three centuries ago. 

The "balance-of-power" question is particularly intriguing. 
Most history texts present the concept as though it were some kind 
of natural, social phenomenon which, somehow, has worked to the 
benefit of mankind. The implication is that it's just wonderful how, 
after all those European wars, no nation was strong enough to 
completely dominate the others. When the United States emerged 
from World War II with exactly such power, it was widely 
deplored, and massive political/financial mechanisms such as 
foreign aid and disarmament were set in motion to restore the 
balance. This has become almost a revered doctrine of international 
democracy. But the overlooked consequence of this sentimental 
notion is that wars "between equals" have become the permanent 
landscape of history. 

This does not mean that every war-like group that comes along 
will find easy financing from the lords and masters. It depends on 
whom they threaten and how likely they are to succeed. In 1830, for 
example, the Dutch were facing an uprising of their subjects in 
Belgium. Both the ruling government and the revolutionaries were 
dependent upon the Rothschilds for financing their conflict. The 
Dutch rulers were reliable customers for loans and, just as impor- 
tant, they were reliable in their payment of interest on those loans. 
It would have been foolhardy to provide more than token assis- 
tance to the rebels who, if they came to power, quite likely would 
have refused to honor the debts of the former puppet regime. 
Salomon Rothschild explained: 

These gentlemen should not count on us unless they decide to 
follow a line of prudence and moderation.... Our goodwill does not 
yet extend to the point of putting clubs into the hands that would beat 
us, that is, lending money to make war and ruin the credit that we 
sustain with all our efforts and all our means. 1 

1- As quoted by Derek Wilson, p. 100. 


After the revolution was resolved by negotiation rather than by 
arms, the new government in Brussels was a natural target for 
financial takeover. James Rothschild laid out the strategy that has 
become the model of such operations ever since: 

Now is the moment of which we should take advantage to make 
ourselves absolute masters of that country's finances. The first step 
will be to establish ourselves on an intimate footing with Belgium's 
new Finance Minister, to gain his confidence ... and to take all the 
treasury bonds he may offer us. 


Wars, great and small, have always been a plague to Europe, 
but it was not until they were easy to finance through central 
banking and fiat money that they became virtually perpetual. For 
example, the following war chronicle begins immediately follow- 
ing the formation of the Bank of England which, as you recall, was 
created for the specific purpose of financing a war: 

1689-1697 The War of the League of Augsberg 
1702-1713 The War of Spanish Succession 
1739-1742 The War of Jenkin's Ear 
1744-1748 The War of Austrian Succession 
1754-1763 The French and Indian War 
1793-1801 The War against Revolutionary France 
1803-1815 The Napoleonic Wars 

In addition to these European conflicts, there also were two 
wars with America: the War for Independence and the War of 1812. 
In the 126 years between 1689 and 1815, England was at war 63 of 
them. That is one out of every two years in combat. The others were 
spent preparing for combat. 

The mark of the Rothschild Formula is unmistakable in these 
conflicts. The monetary scientists often were seen financing both 
sides. Whether ending in victory or defeat, the outcome merely 
preserved or restored the European "balance of power." And the 
most permanent result of any of these wars was expanded govern- 
ment debt for all parties. 


By the end of the eighteenth century, the House of Rothschild 
had become one of the most successful financial institutions the 

1. Derek Wilson, p. 100. 



world has ever known. Its meteoric rise can be attributed to the 
great industry and shrewdness of the five brothers who established 
themselves in various capitals of Europe and forged the world's 
first international financial network. As pioneers in the practice of 
lending money to governments, they soon learned that this pro- 
vided unique opportunities to parlay wealth into political power as 
well. Before long, most of the princes and kings of Europe had 
come within their influence. 

The Rothschilds also had mastered the art of smuggling on a 
grand scale, often with the tacit approval of the governments 
whose laws they violated. This was perceived by all parties as an 
unofficial bonus for providing needed funding to those same 
governments, particularly in time of war. The fact that different 
branches of the Rothschild network also might be providing funds 
for the enemy was pragmatically ignored. Thus, a time-honored 
practice among financiers was born: profiting from both sides. 

The Rothschilds operated a highly efficient intelligence gather- 
ing system which provided them with advance knowledge of 
important events, knowledge which was invaluable for investment 
decisions. When an exhausted Rothschild courier delivered the first 
news of the Battle of Waterloo, Nathan was able to deceive the 
London bond traders into a selling panic, and that allowed him to 
acquire the dominant holding of England's entire debt at but a tiny 
fraction of its worth. 

A study of these and similar events reveals a personality 
profile, not just of the Rothschilds, but of that special breed of 
international financiers whose success typically is built upon 
certain character traits. Those include cold objectivity, immunity to 
patriotism, and indifference to the human condition. That profile is 
the basis for proposing a theoretical strategy, called the Rothschild 
Formula, which motivates such men to propel governments into 
war for the profits they yield. This formula most likely has never 
been consciously phrased as it appears here, but subconscious 
motivations and personality traits work together to implement it 
nevertheless. As long as the mechanism of central banking exists, it 
will be to such men an irresistible temptation to convert debt into 
Perpetual war and war into perpetual debt. 

In the following chapters we shall track the distinctive footprint 
of the Rothschild Formula as it leads up to our own doorstep in the 
present day. 

Historisches Museum, Frankfurt, Germany 

A satirical cartoon of 1848 depicts "Rothschild" 
pondering over which of Europe's rulers to 
favor with loans, while revolutionaries 
challenge the ancient order he is supporting. 

A caricature of Nathan Rothschild, 
showing him in his habitual position 
before one of the pillars in the Exchange. 
It was here that he capitalized on his 
advance knowledge of Wellington's 
defeat of Napoleon at Waterloo and was 
able to acquire the dominant holding of 
England's entire debt at but a small 
fraction of its worth. 


British Museum Print Room 

Chapter Twelve 


The role of]. P. Morgan in providing loans to 
England and Prance in World War I; the souring 
of those loans as it became apparent that Germany 
woidd win; the betrayal of a British ship and the 
sacrifice of American passengers as a stratagem to 
bring America into the war; the use of American 
taxes to pay off the loans. 

The origin of World War I usually is attributed to the assassina- 
tion of Archduke Francis Ferdinand of Austria-Hungary by a 
Serbian nationalist in 1914. This was a serious affront to Austria but 
hardly sufficient reason to plunge the world into a mortal conflict 
that would claim over ten million lives and twenty million 
wounded. American schoolchildren are taught that Uncle Sam 
came into the war "to make the world safe for democracy." But, as 
we shall see, the American war drums were pounded by men with 
far less idealistic objectives. 

Since the latter part of the eighteenth century, the Rothschild 
Formula had controlled the political climate of Europe. Nations had 
increasingly confronted each other over border disputes, colonial 
territories, and trade routes. An arms race had been in progress for 
many years; large, standing armies had been recruited and trained; 
military alliances had been hammered together; all in preparation 
for war. The assassination of Ferdinand was not the cause but the 
trigger. It was merely the spark that lit the fuse that fired the first 
loaded cannon. 


The exigencies of war in Europe required England and France to 
go heavily into debt. When their respective central banks and local 
merchant banks could no longer meet that need, the beleaguered 
governments turned to the Americans and selected the House of 
Morgan— acting as partners of the Rothschilds — to act as sales agent 
for their bonds. Most of the money raised in this fashion was 


quickly returned to the United States to acquire war-sensitive mate- 
rials, and Morgan was selected as the U.S. purchase agent for those 
as well. A commission was paid on all transactions in both direc- 
tions: once when the money was borrowed and again when it was 
spent. Furthermore, many of the companies receiving production 
contracts were either owned outright by Morgan holding compa- 
nies or were securely within his orbit of bank control. Under such an 
arrangement, it will not be surprising to learn, as we shall in a 
moment, that Morgan was not overly anxious to see hostilities come 
to a close. Even the most honorable of men can be corrupted by the 
temptation of such gigantic flows of cash. 

Writing in the year 1919, just a few months after the end of the 
war, John Moody says: 

Not only did England and France pay for their supplies with 
money furnished by Wall Street, but they made their purchases 

through the same medium Inevitably the house of Morgan was 

selected for this important task. Thus the war had given Wall Street an 
entirely new role. Hitherto it has been exclusively the headquarters of 
finance; now it became the greatest industrial mart the world had ever 
known. In addition to selling stocks and bonds, financing railroads, 
and performing the other tasks of a great banking center, Wall Street 
began to deal in shells, cannon, submarines, blankets, clothing, shoes, 
canned meats, wheat, and the thousands of other articles needed for 
the prosecution of a great war. 

The money began to flow in January of 1915 when the House of 
Morgan signed a contract with the British Army Council and the 
Admiralty. The first purchase, curiously, was for horses, and the 
amount tendered was $12 million. But that was but the first drop of 
rain before the deluge. Total purchases would eventually climb to 
an astronomical $3 billion. The firm became the largest consumer on 
earth, spending up to $10 million per day. Morgan offices at 23 Wall 
Street were mobbed by brokers and manufacturers seeking to cut a 
deal. The bank had to post guards at every door and at the partners' 
homes as well. Each month, Morgan presided over purchases which 
were equal to the A ross national product of the entire world just one 
generation before. 

1. John Moody, The Masters of Capital (New Haven: Yale University Press, 1919), 
pp. 164-165. 

2. Chernow, pp. 187-89. 



Throughout all this, Morgan vigorously claimed to be a pacifist. 
"Nobody could hate war more than I do," he told the Senate 
Munitions Committee. But such professions of righteousness were 
difficult to accept. Lewinsohn comments: 

The 500 million dollar loan contracted in autumn 1915 brought to 
the group of bankers, at whose head Morgan was, a net profit of 9 
million dollars.... Again, in 1917, the French government paid to 
Morgan's and other banks a commission of 1,500,000 dollars, and a 
further million in 1918. 

Besides the issue of loans there was another source of profit: the 
purchase and sale of American stock which the Allies surrendered so 
that they could buy munitions in the States. It is estimated that in the 
course of the war some 2000 million [two billion] dollars passed in this 
way through Morgan's hands. Even if the commission was very small, 
transactions of such dimensions would give him an influence on the 
stock market which would carry very real advantages.... 

His hatred against war did not prevent him, citizen of a neutral 
country, from furnishing belligerent powers with 4,400,000 rifles for a 
matter of $194,000,000.... The profits were such as to compensate to 
some degree his hatred of warfare. According to his own account, he 
received, as agent of the English and French governments, a 
commission of 1% on orders totalling $3,000,000,000. That is, he 
received some $30,000,000.... Besides these two chief principals, 
Morgan, however, also acted for Russia (for whom he did business 
amounting to $412,000,000) and for Italy and Canada (figures for his 
business with the last two not having been published).... 

J. P. Morgan, and some of his partners in the bank, were at the time 
shareholders in companies that were ... concerns which made 
substantial profits from the orders he placed with them. .. It is really 
astonishing that a central buying organization should have been 
confided to one who was buyer and seller at the same time. 1 


But there were dark clouds gathering above Wall Street as the 
war began to go badly for the Allies. With the passage of time and 
the condensing of history, it is easy to forget that Germany and the 
Central Powers almost won the war prior to U.S. entry. Employing 
a small fleet of newly developed submarines, Germany was well on 
her way to cutting off England and her allies from all outside help. 
It was an amazing feat and it changed forever the concept of naval 
warfare. Germany had a total of twenty-one U-boats, but, because 

1. Lewinsohn, pp. 103-4,222-24. 



they constantly had to be repaired and serviced, the maximum 
number at sea was only seven at any one time. Yet, between 1914 
and 1918, German submarines had sunk over 5,700 surface ships. 
Three-hundred thousand tons of Allied shipping were sent to the 
bottom every week. One out of every four steamers leaving the 
British Isles never returned. In later years, British Foreign Secretary, 
Arthur Balfour, wrote: "At that time, it certainly looked as though 
we were going to lose the war." 1 Robert Ferrell, in his Woodrow 
Wilson and World War I, concluded: "The Allies approached the 
brink of disaster, with no recourse other than to ask Germany for 
terms." 2 William McAdoo, who was Secretary of the Treasury at the 
time, says in his memoirs: 

Across the sea came the dismay of the British— a dismay that 
carried a deepening note of disaster. There was a fear, and a 
well-grounded one, that England might be starved into abject 
surrender.... On April 27,1917, Ambassador Walter H. Page reported 
confidentially to the President that the food in the British Isles was not 
more than enough to feed the civil population for six weeks or two 
months. 3 

Under these circumstances, it became impossible for Morgan to 
find new buyers for the Allied war bonds, neither for fresh funding 
nor to replenish the old bonds which were coming due and facing 
default. This was serious on several counts. If bond sales came to a 
halt, there would be no money to continue purchasing war materi- 
als. Commissions would be lost at both ends. Furthermore A if the 
previously sold bonds were to go into default, as they certainly 
would if Britain and France were forced to accept peace on 
Germany's terms, the investors would sustain gigantic losses. Some- 
thing had to be done. But what? Robert Ferrell hints at the answer: 

In the mid thirties a Senate committee headed by Gerald P. Nye of 
North Dakota investigated the pre-1917 munitions trade and raised a 
possibility that the Wilson administration went to war because 
American bankers needed to protect their Allied loans. 4 

1. Balfour MSS, FO/800/208, British Foreign Office records, Public Record Office, 
London, as cited by Robert H. Ferrell, Woodrow Wilson and World War I (New York: 
Harper & Row, 1985), p. 35. 

2. Ferrell, p. 12. 

3. William G. McAdoo, Crowded Years (New York: Houghton Mifflin, 1931; rpt. 
New York: Kennikat Press, 1971), p. 392. 

4. Ferrell, p. 88. 



As previously mentioned by William McAdoo, the American 
ambassador to England at that time was Walter Hines Page, a trus- 
tee of Rockefeller's social-engineering foundation called the 
General Education Board. It was learned by the Nye committee that, 
in addition to his government salary, which he complained was not 
high enough, Page also received an allowance of $25,000 a year (an 
enormous amount in 1917) from Cleveland Dodge, president of 
Rockefeller's National City Bank. On March 15, 1917, Ambassador 
Page sent a telegram to the State Department outlining the financial 
crisis in England. Since sources of new capital had dried up, the 
only way to keep the war going, he said, was to make direct grants 
from the U.S. Treasury. But, since this would be a violation of neu- 
trality treaties, the United States would have to abandon its neutral- 
ity and enter the war. He said: 

I think that the pressure of this approaching crisis has gone 
beyond the ability of the Morgan Financial Agency for the British and 
French Governments.... The greatest help we could give the Allies 
would be such a credit.... Unless we go to war with Germany, our 
Government, of course, cannot make such a direct grant of credit. 1 

The Morgan group had floated one-and-a-half billion dollars in 
loans to Britain and France. With the fortunes of war turning against 
them, investors were facing the threat of a total loss. As Ferdinand 
Lundberg observed: "The declaration of war by the United States, in 
addition to extricating the wealthiest American families from a dan- 
gerous situation, also opened new vistas of profits." 2 


One of the most influential men behind the scenes at this time 
was Colonel Edward Mandell House, personal adviser to Woodrow 
Wilson and, later, to F.D.R. House had close contacts with both J.P. 
Morgan and the old banking families of Europe. He had received 
several years of his schooling in England and, in later years, sur- 
rounded himself with prominent members of the Fabian Society. 
Furthermore, he was a man of great personal wealth, most of it 
acquired during the War Between the States. His father, Thomas 
William House, had acted as the confidential American agent of 

1- Quoted by Ferdinand Lundberg, America's Sixty Families (New York: Vanguard 
Press, 1937), p. 141. Also see Link et ah, eds., The Papers ofWoodrow Wilson, Vol. 41 
(1983), pp. 336-37, cited by Ferrell, p. 90. 

2- Lundberg, pp. 141-42. 


unknown banking interests in London. It was commonly believed 
he represented the Rothschilds. Although settled in Houston, Texas, 
the elder often remarked that he wanted his sons to "know and 
serve England." He was one of the few residents of a Confederate 
state who emerged from the War with a great fortune. 

It is widely acknowledged that Colonel House was the man who 
selected Wilson as a presidential candidate and who secured his 
nomination. 1 He became Wilson's constant companion, and the 
President admitted publicly that he depended on him greatly for 
instruction and guidance. Many of Wilson's important appointive 
posts in government were hand selected by House. He and Wilson 
even went so far as to develop a private code so they could commu- 
nicate freely over the telephone. The President himself had written: 
"Mr. House is my second personality. He is my independent self. 
His thoughts and mine are one." 3 

George Viereck, an admiring biographer of House, tells us: 

House had the Texas delegation in his pocket.... Always moving 
quietly in the background, he made and unmade several governors of 
Texas.... House selected Wilson because he regarded him as the best 
available candidate.... 

For seven long years Colonel House was Woodrow Wilson's other 
self. For six long years he shared with him all but the title of the Chief 
Magistracy of the Republic. For six years two rooms were al his 
disposal in the North Wing of the White House.... It was House who 
made the slate for the Cabinet, formulated the first policies of the 
Administration and practically directed the foreign affairs of the 
United States. We had, indeed, two Presidents for one!... 
Super-ambassador, he talked to emperors and kings as an equal He 
was the spiritual generalissimo of the Administration. He was the piiot 
who guided the ship. 4 


As the presidential election neared for Wilson's second term, 
Colonel House entered into a series of confidential talks with Sir 

1. The Columbia Encyclopedia (Third Edition, 1962, p. 2334) says the Democratic 
Party nomination went to Wilson when William Jennings Bryan switched his 
support to him "prompted by Edward M. House." For details, see Martin, p. 155. 

2. Charles Seymour, The Intimate Papers of Colonel House (New York: Houghton 
Mifflin Co., 1926), Vol. 1, pp. 114-15. 

3. Seymour, Vol. I, p. 114. 

4. George Sylvester Viereck, The Strangest Friendship in History: Woodrow Wilson 
and Colonel House (New York: Liveright Publishers, 1932), pp. 4,18-19,33,35. 



William Wiseman, who was attached to the British embassy in 
Washington and who acted as a secret intermediary between House 
and the British Foreign Office. Charles Seymour writes: "Between 
House and Wiseman there were soon to be few political secrets." 1 
This was upsetting to the Secretary of State, William Jennings 
Bryan. Mrs. Bryan, as co-author of her husband's memoirs, writes: 

While Secretary Bryan was bearing the heavy responsibility of the 
Department of State, there arose the curious conditions surrounding 
Mr. E.M. House's unofficial connection with the President and his 
voyages abroad on affairs of State, which were not communicated to 
Secretary Bryan.... The President was unofficially dealing with foreign 
governments. 2 

What was the purpose of those dealings? It was nothing less 
than to work out the means whereby the United States could be 
brought into the war. Viereck explains: 

Ten months before the election which returned Wilson to the 
White House in 1916 "because he kept us out of war," Colonel House 
negotiated a secret agreement with England and France on behalf of 
Wilson which pledged the United States to intervene on behalf of the 

On March 9, 1916, Woodrow Wilson formally sanctioned the 
undertaking. If an inkling of the conversations between Colonel 
House and the leaders of England and France had reached the 
American people before the election, it might have caused incalculable 
revulsions of public opinion.... 

From this conversation and various conferences with Sir Edward 
Grey grew the Secret Treaty, made without the knowledge and 
consent of the United States Senate, by which Woodrow Wilson and 
House chained the United States to the chariot of the Entente.... After 
the War the text of the agreement leaked out. Grey was the first to 
tattle. Page discussed it at length. Colonel House tells its history. 
C. Hartley Grattan discusses it at length in his book, Wlty We Fought. 
But for some incomprehensible reason the enormous significance of 
the revelation never penetrated the consciousness of the American 
people. 3 

! • Seymour, Vol. 11, p. 399. 

2 - William Jennings Bryan and Mary Baird Bryan, The Memoirs of William Jennings 
Bryan (New York: Kennikat Press, 1925), Vol. 11, pp. 404-5. 

3- Viereck, pp. 106-08. This matter, along with the complete text of Sir Grey's 
memorandum, is discussed in The Memoirs of William Jennings Bryan Vol. 11, pp. 



The basic terms of the agreement were that the United States 
government would offer to negotiate a peaceful settlement between 
Germany find the Allies and would then put forth a specific pro- 
posal for the terms of that settlement. If either side refused to accept 
the proposal, then the United States would come into the war as an 
ally of the other side. The catch was that the terms of the proposal 
were carefully drafted so that Germany could not possibly accept 
them. Thus, to the world, it would look as though Germany was at 
fault and the United States was humanitarian. As Ambassador Page 
observed in a memorandum dated February 9,1916: 

House arrived from Berlin-Havre-Paris full of the idea of 
American intervention. First his plan was that he and I and a group of 
the British Cabinet (Grey, Asquith, Lloyd George, Reading, etc.) 
should at once work out a minimum programme of peace — the least 

that the Allies would accept, which, he assumed, would be unacceptable to 

the Germans; and that the President would take this programme and 
present it to both sides; the side that declined would be responsible for 
continuing the war.... Of course, the fatal moral weakness of the 
foregoing scheme is that we should plunge into the War, not on the 
merits of the cause, but by a carefully sprung trick 1 

On the surface it is a paradox that Wilson, who had always been 
a pacifist, should now enter into a secret agreement with foreign 
powers to involve the United States in a war which she could easily 
avoid. The key that unlocks this mystery is the fact that Wilson also 
was an internationalist. One of the strongest bonds between House 
and himself was their common dream of a world government. They 
both recognized that the American people would never accept such 
a concept unless there were extenuating circumstances. They rea- 
soned that a long and bloody war was probably the only event that 
could condition the American mind to accept the loss of national 
sovereignty, especially if it were packaged with the promise of put- 
ting an end to all wars in the future. Wilson knew, also, that, if the 
United States came into the war early enough to make a real differ- 
ence on the battlefield and if large amounts of American dollars 
could be loaned to the Allied powers, he would be in a position after 
the war to dictate the terms of peace. He wrote to Colonel House: 
"England and France have not the same views with regard to peace 
as we have by any means. When the war is over, we can force them 

1. Quoted by Viereck, pp. 112-13. 



to our way of thinking, because by that time they will among other 
things be financially in our hands." 1 And so Wilson tolerated the 
agony of mixed emotions as he plotted for war as a necessary evil to 
bring about what he perceived as the ultimate good of world gov- 

With the arrival of 1917, the President was planting hints of both 
war and world government in almost every public utterance. In a 
typical statement made in March of that year, he said: "The tragic 
events of the thirty months of vital turmoil through which we have 
just passed have made us citizens of the world. There can be no 
turning back. Our own fortunes as a nation are involved, whether 
we would have it so or not." 2 

It was about this same time that Wilson called together the 
Democratic leaders of Congress to a special breakfast meeting at the 
White House. He told them that, in spite of public sentiment, there 
were many sound reasons for the country to enter the war and he 
asked them to help him sell this plan to Congress and the voters. 
Harry Elmer Barnes tells us: 

These men were opposed to war and, hence, rejected his proposals 
somewhat heatedly. Wilson knew that it was a poor time to split the 
party just before an election, so he dropped the matter at once and, 
with Col. House, mapped out a pacifist platform for the coming 
campaign. Governor Martin Glynn of New York and Senator Ollie 
James of Kentucky were sent to the St. Louis convention to make 
keynote speeches, which were based on the slogan: "He kept us out of 
war!"... Before he had been inaugurated a second time, the Germans 
played directly into his hands by announcing the resumption of 
submarine warfare.... It was fortunate for Britain and the bankers that 
the Germans made this timely blunder, as Great Britain had 
overdrawn her American credit by some $450,000,000 and the bankers 
were having trouble in floating more large private loans. It was 
necessary now to pass on the burden of financing the Entente to the 
Federal Treasury. 

1- Quoted by Ferrell, p. 88. 

2- Ferrell, p. 12. 

3. Harry Elmer Barnes, In Quest of Truth and Justice: De-Bunking the War Guilt Myth 
(Chicago: National Historical Society, 1928; rpt. New York: Arno Press & The New 
York Times, 1972), p. 104. For an additional account of this meeting, see Viereck, pp. 




Through secret agreements and trickery, America had been 
committed to war, but the political and monetary scientists realized 
that something still had to be done to change public sentiment. How 
could that be accomplished? 

Wall Street control over important segments of the media was 
considerable. George Wheeler tells us: "Around this time the 
Morgan firm was choosing the top executives for the old and trou- 
bled Harper & Brothers publishing house.... In the newspaper field, 
Pierpont Morgan at this period was in effective control of the New 
York Sun,... the Boston News Bureau, Barron's magazine, and the 
Wall Street Journal" 1 

On February 9,1917, Representative Callaway from Texas took 
the floor of Congress and provided further insight. He said: 

In March, 1915, the J.P. Morgan interests, the steel, shipbuilding, 
and powder interests, and their subsidiary organizations, got together 
12 men high up in the newspaper world and employed them to select 
the most influential newspapers in the United States and sufficient 
number of them to control generally the policy of the daily press.. 
They found it was only necessary to purchase the control of 25 of the 
greatest papers.... An agreement was reached; the policy of the papers 
was bought, to be paid for by the month an editor was furnished for 
each paper to properly supervise and edit information regarding the 
questions of preparedness, militarism, financial policies, and other 
things of national and international nature considered vital to the 
interests of the purchasers. 2 

Charles S. Mellen of the New Haven Railroad testified before 
Congress that his Morgan-owned railroad had more than one- 
thousand New England newspapers on the payroll, costing about 
$400,000 annually. The railroad also held almost a half -million dol- 
lars in bonds issued by the Boston Herald. 3 This web of control was 
multiplied by hundreds of additional companies which also were 
controlled by Morgan and other investment-banking houses. 

In addition, the Morgan trust exercised media control by its 
power of advertising. Writing in 1937, Lundberg says: "More adver- 
tising is controlled by the J.P. Morgan junta than by any single 

1. George Wheeler, Pierpont Morgan and Friends: The Anatomy of a Myth (Engle- 
wood Cliffs, New Jersey: Prentice Hall, 1973), pp. 283-84. 

2. Congressional Record, Vol. 54, Feb. 9,1917, p. 2947 

3. Lundberg, p. 257. 



financial group, a factor which immediately gives the banking 
house the respectful attention of all alert independent publishers." 

Morgan control over the media at that time is well documented, 
but he was by no means alone in this. During the 1912 hearings held 
by the Senate Privileges and Elections Committee, it was revealed 
that Representative Joseph Sibley from Pennsylvania was acting as 
a funnel for Rockefeller money to various cooperative Congress- 
men. A letter was introduced to the Committee written by Sibley in 
1905 to John D. Archbold, the man at Rockefeller's Standard Oil 
Company who provided the money. In that letter Sibley said: "An 
efficient literary bureau is needed, not for a day or a crisis but a 
permanent healthy control of the Associated Press and kindred 
avenues. It will cost money but will be the cheapest in the end." 2 

Lundberg comments further: 

So far as can be learned, the Rockefellers have given up their old 
policy of owning newspapers and magazines outright, relying now 
upon the publications of all camps to serve their best interests in return 
for the vast volume of petroleum and allied advertising under 
Rockefeller control. After the J.P. Morgan bloc, the Rockefellers have 
the most advertising of any group to dispose of. And when advertising 
alone is not sufficient to insure the fealty of a newspaper, the 
Rockefeller companies have been known to make direct payments in 
return for a friendly editorial attitude. 3 

It is not surprising, therefore, that a large part of the nation's 
press, particularly in the East, began to editorially denounce 
Germany. The cry spread across the land to take up arms against 
"the enemy of western civilization." Editors became eloquent on the 
patriotic duty of all Americans to defend world democracy. Massive 
"preparedness" demonstrations and parades were organized. 

But it was not enough. In spite of this massive sales campaign, 
the American people still were not buying. Polls conducted at the 
time showed popular sentiment continuing to run ten-to-one in 
favor of staying out of Europe's war. Clearly, what was needed was 
something both drastic and dramatic to change public opinion. 

1- Lundberg, p. 252. 

2- Ibid , pp. 97,249. 
3. Ibid., p. 247. 



Banking was not the only business in which Morgan had a 
strong financial interest. Using his control over the nation's rail- 
roads as financial leverage, he had created an international shipping 
trust which included Germany's two largest lines plus one of the 
two in England, the White Star Lines. Morgan had attempted i n 
1902 to take over the remaining British line, the Cunard Company 
but was blocked by the British Admiralty which wanted to keep 
Cunard out of foreign control so her ships could be pressed into 
military service, if necessary, in time of war. The Lusitania and the 
Mauretania were built by Cunard and became major competitors of 
the Morgan cartel. It is an interesting footnote of history, therefore, 
that, from the Morgan perspective, the Lusitania was quite dispensa- 
ble. Ron Chernow explains: 

Pierpont assembled a plan for an American-owned shipping trust 
that would transpose his "community of interest" 
principle — cooperation among competitors in a given industry — to a 
global plane. He created ... the world's largest [fleet] under private 
ownership.... An important architect of the shipping trust was Albert 
Ballin, whose Hamburg-Amerika Steamship Line, with hundreds of 
vessels, was the world's largest shipping company.... Pierpont had to 
contend with a single holdout, Britain's Cunard Line.... After the Boer 
War, the Morgan combine and Cunard exhausted each other in 
debilitating rate wars." 1 

As stated previously, Morgan had been retained as the official 
trade agent for Britain. He handled the purchasing of all war matt- 
rials in the United States and coordinated their shipping as well. 
Following in the footsteps of the Rothschilds of centuries past, he 
quickly learned the profitable skills of war-time smuggling. Colin 
Simpson, author of The Lusitania, describes the operation: 

Throughout the period of America's neutrality, British servicemen 
in civilian clothes worked at Morgan's. This great banking combine 
rapidly established such a labyrinthine network of false shippers, bank 
accounts and all the paraphernalia of smuggling that, although they 
fooled the Germans, there were also some very serious occasions 
when they flummoxed the Admiralty and Cunard, not to speak of the 
unfortunate passengers on the liners which carried the contraband. 2 

1. Chernow, pp. 100-01. 

2. Colin Simpson, The Lusitania (Boston: Little, Brown & Co., 1972), p. 50. 




The Lusitania was a British passenger liner that sailed regularly 
between Liverpool and New York. She was owned by the Cunard 
Company, which, as previously mentioned, was the only major ship 
line which was a competitor of the Morgan cartel. She left New York 
harbor on May 1, 1915, and was sunk by a German submarine off 
the coast of Ireland six days later. Of the 1,195 persons who lost their 
lives, 195 were Americans. It was this event, more than any other, 
that provided the advocates of war with a convincing platform for 
their views, and it became the turning point where Americans reluc- 
tantly began to accept, if not the necessity of war, at least its inevita- 

The fact that the Lusitania was a passenger ship is misleading. 
Although she was built as a luxury liner, her construction specifica- 
tions were drawn up by the British Admiralty so that she could be 
converted, if necessary, into a ship of war. Everything from the 
horsepower of her engines and the shape of her hull to the place- 
ment of ammunition storage areas were, in fact, military designs. 
She was built specifically to carry twelve six-inch guns. The con- 
struction costs for these features were paid for by the British govern- 
ment. Even in times of peace, it was required that her crew include 
officers and seamen from the Royal Navy Reserve. 

In May of 1913, she was brought back into dry dock and outfit- 
ted with extra armor, revolving gun rings on her decks, and shell 
racks in the hold for ammunition. Handling elevators to lift the 
shells to the guns were also installed. Twelve high-explosive can- 
nons were delivered to the dry dock. All this is a matter of public 
record at the National Maritime Museum in Greenwich, England, 
but whether the guns were actually installed at that time is still hotly 
debated. There is no evidence that they were. In any event, on 
September 17, the Lusitania returned to sea ready for the rigors of 
war, and she was entered into the Admiralty fleet register, not as a 
passenger liner, but an armed auxiliary cruiser] From then on, she was 
listed in Jane's Fighting Ships as an auxiliary cruiser and in the British 
publication, The Naval Annual, as an armed merchant man. 1 

Part of the dry dock modification was to remove all the passen- 
ger accommodations in the lower deck to make room for more 

1- Simpson, pp. 17-28, 70. 


military cargo. Thus, the Lusitania became one of the most impor- 
tant carriers of war materials — including munitions — from the 
United States to England. On March 8, 1915, after several close calls 
with German submarines, the captain of the Lusitania turned in his 
resignation. He was willing to face the U-boats, he said, but he was 
no longer willing "to carry the responsibility of mixing passengers 
with munitions or contraband." 


From England's point of view, the handwriting on the wall was 
clear. Unless the United States could be brought into the war as her 
ally, she soon would have to sue for peace. The challenge was how 
to push Americans off their position of stubborn neutrality. How 
that was accomplished is one of the more controversial aspects of 
the war. It is inconceivable to many that English leaders might have 
deliberately plotted the destruction of one of their own vessels with 
American citizens aboard as a means of drawing the United States 
into the war as an ally. Surely, any such idea is merely German 
propaganda. Robert Ballard, writing in National Geographic, says: 
"Within days of the sinking, German sympathizers in New York 
came up with a conspiracy theory. The British Admiralty, they said, 
had deliberately exposed Lusitania to harm, hoping she would be 
attacked and thus draw the U.S. into the war." 

Let's take a closer look at this conspiracy theory. Winston 
Churchill, who was First Lord of the Admiralty at that time, said: 

There are many kinds of maneuvers in war There are 

maneuvers in time, in diplomacy, in mechanics, in psychology; all of 
which are removed from the battlefield, but react often decisively 
upon it.... The maneuver which brings an ally into the field is as 
serviceable as that which wins a great battle. The maneuver which 
gains an important strategic point may be less valuable than that 
which placates or overawes a dangerous neutral. 

The maneuver chosen by Churchill was particularly ruthless. 
Under what was called the Cruiser Rules, warships of both England 
and Germany gave the crews of unarmed enemy merchant ships a 

1. Simpson, p. 87. 

2. "Riddle of the Lusitania," by Robert Ballard, National Geographic, April, 1994, 
p. 74. 

3. Winston Churchill, The World Crisis (New York: Scribner's Sons, 1949), p. 300. 
This appears on p. 464 of the Barnes & Noble 1993 reprint. 



chance to take to the lifeboats before sinking them. But, in October 
of 1914, Churchill issued orders that British merchant ships must no 
longer obey a U-boat order to halt and be searched. If they had 
armament, they were to engage the enemy. If they did not, they 
were to attempt to ram the sub. The immediate result of this change 
was to force German U-boats to remain submerged for protection 
and to simply sink the ships without warning. 

Why would the British want to do such a stupid thing that 
would cost the lives of thousands of their own seamen? The answer 
is that it was not an act of stupidity. It was cold blooded strategy. 
Churchill boasted: 

The first British countermove, made on my responsibility,... was to 
deter the Germans from surface attack. The submerged U-boat had to 
rely increasingly on underwater attack and thus ran the greater risk of 
mistaking neutral for British ships and of drowning neutral crews and 
thus embroiling Germany with other Great Powers. 1 

To increase the likelihood of accidentally sinking a ship from a 
neutral "Great Power," Churchill ordered British ships to remove 
their names from their hulls and, when in port, to fly the flag of a 
neutral power, preferably that of the United States. As further 
provocation, the British navy was ordered to treat captured U-boat 
crew members not as prisoners of war but as felons. "Survivors," 
wrote Churchill, "should be taken prisoner or shot— whichever is 
the most convenient." 2 Other orders, which now are an embarrass- 
ing part of official navy archives, were even more ruthless: "In all 
actions, white flags should be fired upon with promptitude." 

The trap was carefully laid. The German navy was goaded into 
a position of shoot-first and ask questions later and, under those 
conditions, it was inevitable that American lives would be lost. 


After many years of investigation, it is now possible to identify 
the cargo that was loaded aboard the Lusitania on her last voyage. It 
included 600 tons of pyroxyline (commonly called gun cotton), 4 

I Churchill, pp. 274-75. 

2. Taken from the Diaries of Admiral Sir Hubert Richmond, Feb. 27,1915, National 
Maritime Museum, Greenwich, as quoted by Simpson, p. 37. 

3. P.R.O., ADM/116/1359, Dec. 23,1914, quoted by Simpson, p. 37. 

4. Gun cotton explodes with three-times the force of gunpowder in a confined 
space and can be ignited at a much lower flash point. See Eissler, Manuel, Modern 
High Explosives (New York: John Wiley & Sons, 1914), pp. 110,112,372. 



six-million rounds of ammunition, 1,248 cases of shrapnel shells 
(which may not have included explosive charges), plus an unknown 
quantity of munitions that completely filled the holds on the lowest 
deck and the trunkways and passageways of F deck. In addition, 
there were many tons of "cheese," "lard," "furs" and other items 
which were shown later to be falsely labelled. What they were is not 
now known, but it is certain they were at least contraband if not 
outright weapons of war. They were all consigned through the / P. 
Morgan Company. But none of this was suspected by the public, 
least of all those hapless Americans who unknowingly booked a 
passage to death for themselves and their families as human decoys 
in a global game of high finance and low politics. 

The German embassy in Washington was well aware of the 
nature of the cargo being loaded aboard the Lusitania and filed a 
formal complaint to the United States government, because almost 
all of it was in direct violation of international neutrality treaties. 
The response was a flat denial of any knowledge of such cargo. 
Seeing that the Wilson Administration was tacitly approving the 
shipment, the German embassy made one final effort to avert disas- 
ter. It placed an ad in fifty East Coast newspapers, including those 
in New York City, warning Americans not to take passage on the 
Lusitania. The ad was prepaid and requested to be placed on the 
paper's travel page a full week before the sailing date. It read as 


TRAVELERS intending to embark on the Atlantic voyage 
are reminded that a state of war exists between Germany 
and her allies and Great Britain and her allies; that the zone 
of war includes the waters adjacent to the British Isles; that, 
in accordance with formal notice given by the Imperial 
German Government, vessels flying the flag of Great 
Britain, or of any of her allies, are liable to destruction in 
those waters and that travelers sailing in the war zone on 
ships of Great Britain or her allies do so at their own risk. 


Washington, D.C., April 22,1915. 



Although the ad was in the hands of newspapers in time for the 
requested deadline, the State Department intervened and, raising 
the specter of possible libel suits, frightened the publishers into not 
printing it without prior clearance from State Department attorneys. 
Of the fifty newspapers, only the Des Moines Register carried the ad 
on the requested date. What happened next is described by 

George Viereck [who was the editor of a G e r m an- o wne d 
newspaper at that time and who had placed the ads on behalf of the 
embassy] spent April 26 asking the State Department why his 
advertisement had not been published. Eventually he managed to 
obtain an interview with [Secretary of State, William Jennings] Bryan 
and pointed out to him that on all but one of her wartime voyages the 
LllSltania had carried munitions. He produced copies of her 
supplementary manifests, which were open to public inspection at the 
collector's office. More important, he informed Bryan, no fewer than 
six million rounds of ammunition were due to be shipped on the 
LllSltania the following Friday and could be seen at that moment being 
loaded on pier 54. Bryan picked up the telephone and cleared the 
publication of the advertisement. He promised Viereck that he would 
endeavor to persuade the President publicly to warn Americans not to 
travel. No such warning was issued by the President, but there can be 
no doubt that President Wilson was told of the character of the cargo 
destined for the LuSlttinW. He did nothing, but was to concede on the 
day he was told of her sinking that his foreknowledge had given him 
many sleepless hours. 1 

It is probably true that Wilson was a pacifist at heart, but it is 
equally certain that he was not entirely the master of his own des- 
tiny. He was a transplanted college professor from the ivy-covered 
walls of Princeton, an internationalist at heart who dreamed of help- 
ing to create a world government and to usher in a millennium of 
peace. But he found himself surrounded by and dependent upon 
men of strong wills, astute political aptitudes, and powerful finan- 
cial resources. Against these forces, he was all but powerless to act 
on his own, and there is good reason to believe that he inwardly 
suffered over many of the events in which he was compelled to par- 
ticipate. We shall leave it to others to moralize about a man who, by 
his deliberate refusal to warn his countrymen of their mortal peril, 
sends 195 of them to their watery graves. We may wonder, also, 

1. Simpson, p. 97. 


about how such a man can commit the ultimate hypocrisy of 
condemning the Germans for this act and then doing everything 
possible to prevent the American public from learning the truth. It 
would be surprising if the extent of his private remorse was not 
greater than merely a few sleepless hours. 


But we are getting slightly ahead of the story. While Morgan 
and Wilson were setting the deadly stage on the American side of 
the Atlantic, Churchill was playing his part on the European side. 
When the Lusitania left New York Harbor on May 1, her orders were 
to rendezvous with a British destroyer, the Juno, just off the coast of 
Ireland so she would have naval protection as she entered hostile 
waters. When the Lusitania reached the rendezvous point, however, 
she was alone, and the captain assumed they had missed each other 
in the fog. In truth, the Juno had been called out of the area at the last 
minute and ordered to return to Queenstown. And this was done 
with the full knowledge that the Lusitania was on a direct course 
into an area where a German submarine was known to be operat- 
ing. To make matters worse, the Lusitania had been ordered to cut 
back on the use of coal, not because of shortages, but because it 
would be less expensive. Slow targets, of course, are much easier to 
hit. Yet, she was required to shut down one of her four boilers and, 
consequently, was now entering submarine-infested waters at only 
75% of her potential speed. 

As the Lusitania drew closer to hostile waters, almost everyone 
knew she was in grave danger. Newspapers in London were alive 
with the story of German warnings and recent sinkings. In the map 
room of the British Admiralty, Churchill watched the play unfold 
and coldly called the shots. Small disks marked the places where 
two ships had been torpedoed the day before. A circle indicated the 
area within which the U-boat must still be operating. A larger disk 
represented the Lusitania travelling at nineteen knots directly into the 
circle. Yet, nothing was done to help her. Admiral Coke at Queen- 
stown was given perfunctory instructions to protect her as best he 
could, but he had no means to do so and, in fact, no one even both- 
ered to notify the captain of the Lusitania that the rendezvous with 
the Juno had been canceled. 

One of the officers present in the high-command map room on 
that fateful day was Commander Joseph Kenworthy, who pre- 



viously had been called upon by Churchill to submit a paper on 
what would be the political results of an ocean liner being sunk with 
American passengers aboard. He left the room in disgust at the 
cynicism of his superiors. In 1927, in his book, The Freedom of the 
Seas, he wrote without further comment: "The Lusitania was sent at 
considerably reduced speed into an area where a U-boat was 
known to be waiting and with her escorts withdrawn." Further 
comment is not needed. 

Colonel House was in England at that time and, on the day of 
the sinking, was scheduled to have an audience with King 
George V. He was accompanied by Sir Edward Grey and, on the 
way, Sir Grey asked him: "What will America do if the Germans 
sink an ocean liner with American passengers on board?" As 
recorded in House's diaries, he replied: "I told him if this were 
done, a flame of indignation would sweep America, which would in 
itself probably carry us into the war." 2 Once at Buckingham Palace, 
King George also brought up the subject and was even more specific 
about the possible target. He asked, "Suppose they should sink the 
Lusitania with American passengers onboard...." 


Four hours after this conversation, the black smoke of the 
Lusitania was spotted on the horizon through the periscope of the 
German submarine, U-20. The ship came directly toward the 
U-boat, allowing it to full-throttle out of her path and swing around 
for a ninety-degree shot at her bow as she passed only 750 yards 
away. The torpedo struck nine feet below the water line on the star- 
board side slightly forward of the bridge. A second torpedo was 
readied but not needed. Quickly after the explosion of the impact, 
there was a second and much larger explosion that literally blew the 
side off of cargo hold number two and started the great ship imme- 
diately toward the bottom. And what a hole it must have been. The 
Lusitania, one of the largest ships ever built, sank in less than eight- 
een minutes! 

1. Joseph M. Ken worthy and George Young, The Freedom of the Seas (New York: 

Ayer Company, 1929), p. 211. 

2. Seymour, Vol I, p. 432 

3. Ibid., p. 432. 


Survivors among the crew who were working in the boiler 
rooms during the attack have attested that the boilers did not blow 
at that time. Simpson tells us: 

The G torpedo had failed to blow in the inner bulkhead of No 1 
boiler room, but just further forward something blew out most of the 
bottom of the bow of the ship. It may have been the Bethlehem 
Company's 3-inch shells, the six million rounds of rifle ammunition or 
the highly dubious contents of the bales of furs or the small 
forty-pound boxes of cheese. Divers who have been down to the wreck 
unanimously testify that the bow was blasted by a massive internal 
explosion, and large pieces of the bow plating, buckled from the 
inside, are to be found some distance from the hull. 1 

When a search team from the Woods Hole Oceanographic Insti- 
tute surveyed the wreckage in the summer of 1993, they reported: 
"When our cameras swept across the hold, we got a big surprise- 
There was no hole.... We found no evidence that U-20's torpedo had 
detonated an explosion, undermining one theory of why the liner 

It is difficult to share the team's surprise. Photographs show that 
the wreck is resting on its starboard (right) side. Since that is where 
the torpedo struck, it is logical that the hole would not be visible. It 
would be on the side buried in the ocean floor. The team reported 
that they were able to inspect only part of the hull's underside. That 
is because most of it — plus the entire starboard side — is buried in the 
muck. Since the torpedo struck only nine feet below the waterline, 
the hole would not logically be anywhere near the bottom of the 
hull but at a point midway between the main deck and the bottom. 
In other words, it would be at the midpoint of the side that is now 
facing down. Failure to see the hole does not undermine the theory 
of internal explosion. It is exactly what one would expect. 

In any event, it should be obvious that the Lusitania would not 
have gone to the bottom in eighteen minutes without a hole some- 
where. Even the search team had to acknowledge that fact indirectly 
when it addressed the question of what might have caused the 
second explosion. In an obvious effort to avoid giving support to a 
"conspiracy theory," the report concluded that the explosion prob- 
ably was caused, not by munitions, but by coal dust. 

1. Simpson, p. 157. 

2. Ballard, "Riddle of the Lusitania," pp. 74, 76. 



In the final analysis, it makes little difference whether the explo- 
sion was caused by munitions or coal dust. The fact that it could have 
been caused by munitions is sufficient for the case. 


An official inquiry, under the direction of Lord Mersey, was 
held to determine the facts of the sinking and to place the blame. It 
was a rigged affair from the beginning. All evidence and testimony 
was carefully pre-screened to make sure that nothing was admitted 
into the record which would reveal duplicity on the part of British 
or American officials. Among the papers submitted to Lord Mersey 
prior to the hearings was one from Captain Richard Webb, one of 
the men chosen by the navy to assist in the cover up. It read: "I am 
directed by the board of Admiralty to inform you that it is consid- 
ered politically expedient that Captain Turner, the master of the 
Lusitania, be most prominently blamed for the disaster." 1 

The final report was a most interesting document. Anyone read- 
ing it without knowledge of the facts would conclude that Captain 
William Turner was to blame for the disaster. Even so, Mersey 
attempted to soften the blow. He wrote: "...blame ought not to be 
imputed to the captain.... His omission to follow the advice in all 
respects cannot fairly be attributed either to negligence or incompe- 
tence." And then he added a final paragraph which, on the surface, 
appears to be a condemnation of the Germans but which, if read 
with understanding of the background, was an indictment of 
Churchill, Wilson, House and Morgan. He wrote: 

The whole blame for the cruel destruction of life in this 
catastrophe must rest solely with those who plotted and with those 
who committed the crime. 2 

Did Lord Mersey know that there could be a dual meaning to his 
Words? Perhaps not, but, two days after delivering his judgment, he 
wrote to Prime Minister Asquith and turned down his fee for serv- 
ices. He added: "I must request that henceforth I be excused from 
administering His Majesty's Justice." In later years, his only com- 
ment on the event was: "The Lusitania case was a damn dirty 
business." 3 

1- The Papers of Lord Mersey, Bignor Park, Sussex, as quoted by Simpson, p. 190. 

2. Simpson, p. 241. 

3. Ibid., p. 241. 



The purposes of the Cabal would have been better served had 
an American ship been sunk by the Germans, but a British ship with 

195 Americans drowned was sufficient to do the jo 
wasted no time in whipping up public sentiment. Wilson sent a note 
of outraged indignation to the Imperial German Government, and 
this was widely quoted in the press. 

By that time, Bryan had become completely disillusioned by the 
duplicity of his own government. On May 9, he sent a dour note to 

Germany has a right to prevent contraband going to the Allies 
and a ship carrying contraband should not rely upon passengers to 
protect her from attack-it would be like putting women and children 
in front of an army. 

This did not deter Wilson from his commitment. The first note 
was followed by an even stronger one with threatening overtones 
which was intensely discussed at the Cabinet meeting on the first of 
June. McAdoo, who was present at the meeting, says: 

I remember that Bryan had little to say at this meeting; he sat 
throughout the proceedings with his eyes half closed most of the time 
After the meeting he told the President, as I learned later, that he could 
not sign the note.... Bryan went on to say that he thought his 
usefulness as Secretary of State was over, and he proposed to resign 2 

At the request of Wilson, McAdoo was dispatched to the Bryans' 
home to persuade the Secretary to change his mind, lest his resigna- 
tion be taken as a sign of disunity within the President's Cabinet 
Bryan agreed to think it over one more day but, the following morn- 
ing, his decision remained firm. In his memoirs, annotated by his 
wife, Mrs. Bryan reveals that her husband could not sleep that night 
He was so restless I suggested that he read a little till he should 
become drowsy. He had in his handbag a copy of an old book 
printed in 1829 and called A Wreath of Appreciation of Andrew 
Jackson. He found it very interesting." 3 

What irony. In chapter seventeen we shall review the total war 
waged by President Jackson against the Bank of the United States, 

1 • Bryan, Vol II, pp. 398-9. 

2. McAdoo, p. 333. 

3. Bryan, Vol. II, p. 424. 



the predecessor of the Federal Reserve System, and we shall be 
reminded that it was Jackson who prophesied: 

Is there no danger to our liberty and independence in a bank that 
in its nature has so little to bind it to our country?... [Is there not] cause 
to tremble for the purity of our elections in peace and for the 
independence of our country in war?... Controlling our currency, 
receiving our public monies, and holding thousands of our citizens in 
dependence, it would be more formidable and dangerous than a naval 
and military power of the enemy. 1 

One can only wonder what thoughts went through Bryan's 
mind as he recalled Jackson's warning and applied it to the artifi- 
cially created war hysteria that, at that very moment, was being 
generated by the financial powers on Wall Street and at the newly 
created Federal Reserve. 

From England, Colonel House sent a telegram to President 
Wilson which he, in turn, read to his Cabinet. It became the genesis 
of thousands of newspaper editorials across the land. He said 

America has come to the parting of the ways, when she must 
determine whether she stands for civilized or uncivilized warfare. We 
can no longer remain neutral spectators. Our action in this crisis will 
determine the part we will play when peace is made, and how far we 
may influence a settlement for the lasting good of humanity. We are 
being weighed in the balance, and our position amongst nations is 
being assessed by mankind. 2 

In another telegram two days later, House reveals himself as the 
master psycho-politician playing on Wilson's ego like a violinist 
stroking the strings of a Stradivarius. He wrote: 

If, unhappily, it is necessary to go to war, I hope you will give the 
world an exhibition of American efficiency that will be a lesson for a 
century or more. It is generally believed throughout Europe that we 
are so unprepared and that it would take so long to put our resources 
into action, that our entering would make but little difference. 

In the event of war, we should accelerate the manufacture of 
munitions to such an extent that we could supply not only ourselves 
but the Allies, and so quickly that the world would be astounded. 3 

1 Herman E. Krooss, ed., Documentary History of Banking and Currency in the Unites 
States (New York: Chelsea House, 1983), Vol. Ill, pp. 26-27. 
2- Seymour, p. 434. 
3. Ibid., p. 435. 


Congress could not resist the combined pressure of the press 
and the President. On April 16, 1917, the United States officially 
declared war on the Axis powers. Eight days later, Congress duti- 
fully passed the War Loan Act which extended $1 billion in credit to 
the Allies. The first advance of $200 million went to the British the 
next day and was immediately applied as payment on the debt to 
Morgan. A few days later, $100 million went to France for the same 
purpose. But the drain continued. Within three months the British 
had run up their overdraft with Morgan to $400 million dollars, and 
the firm presented it to the government for payment. The Treasury, 
however, was unable to put its hands on that amount of money 
without jeopardizing its own spendable funds and, at first, refused 
to pay. The problem was quickly solved, however, through a 
maneuver described at some length in chapter ten. The Federal 
Reserve System under Benjamin Strong simply created the needed 
money through the Mandrake Mechanism. "The Wilson Admini- 
stration found itself in an extremely awkward position, having to 
bail out J.P. Morgan," wrote Ferrell, but Benjamin Strong "offered to 
help [Treasury-Secretary] McAdoo out of the difficulty. Over the 
following months in 1917-18 the Treasury quietly paid Morgan 
piecemeal for the overdraft." By the time the war was over, the 
Treasury had loaned a total of $9,466,000,000 including 
$2,170,000,000 given after the Armistice. 

That was the cash flow they had long awaited. In addition to 
saving the Morgan loans, even larger profits were to be made from 
war production. The government had been secretly preparing for 
war for six months prior to the actual declaration. According to 
Franklin D. Roosevelt, then Assistant Secretary of the Navy, the 
Navy Department began extensive purchasing of war supplies in 
the Fall of 1916. 2 Ferdinand Lundberg adds this perspective: 

By no accident all the strategic government posts, notably those 
concerned with buying, were reserved for the Wall Street patriots. On 
the most vital appointments, Wilson consulted with Dodge [President 
of Rockefeller's National City Bank], who ... recommended the 
hitherto unknown [Bernard] Baruch, speculator in copper stocks, as 
chairman of the all-powerful War Industries Board.... 

1. Ferrell, p. 89,90. 

2. Clarence W. Barron, They Told Barron; Notes of Clarence Walker Barron, edited 
by Arthur Pound and Samuel Taylor Moore (New York: Harper and Brothers, 
1930), p. 51. 



As head of the War Industries Board, Baruch spent government 
funds at the rate of $10,000,000,000 annually.... Baruch packed the War 
Industries Board and its committees with past and future Wall Street 
manipulators, industrialists, financiers, and their agents ... who fixed 
prices on a cost-plus basis and, as subsequent investigations revealed, 
saw to it that costs were grossly padded so as to yield hidden profits.... 

The American soldiers fighting in the trenches, the people 
working at home, the entire nation under arms, were fighting, not only 
to subdue Germany, but to subdue themselves. That there is nothing 
metaphysical about this interpretation becomes clear when we 
observe that the total wartime expenditure of the United States 
government from April 6, 1917, to October 31, 1919, when the last 
contingent of troops returned from Europe, was $35,413,000,000. Net 
corporation profits for the period January 1,1916, to July, 1921, when 
wartime industrial activity was finally liquidated, were 
$38,000,000,000, or approximately the amount of the war 
expenditures. More than two-thirds of these corporation profits were 
taken by precisely those enterprises which the Pujo Committee had 
found to be under the control of the "Money Trust." 

The banking cartel was able, through the operation of the 
Federal Reserve System, to create the money to give to England and 
France so they, in turn, could pay back the American banks — 
exactly as was to be done again in World War II and again in the Big 
Bailout of the 1980s and '90s. It is true that, in 1917, the recently en- 
acted income tax was useful for raising a sizable amount of revenue 
to conduct the war and also, as Beardsley Ruml pointed out a few 
years later, to take purchasing power away from the middle class. 
But the greatest source of funding came, as it always does in war- 
time, not from direct taxes, but from the hidden tax called inflation. 
Between 1915 and 1920, the money supply doubled from $20.6 bil- 
lion to $39.8 billion. 2 Conversely, during World War I, the purchas- 
ing power of the currency fell by almost 50%. That means 
Americans unknowingly paid to the government approximately 
one-half of every dollar that existed. And that was in addition to their 
taxes. This massive infusion of money was the product of the 
Mandrake Mechanism and cost nothing to create. Yet, the banks 
were able to collect interest on it all. The ancient partnership 

1. Lundberg, pp. 134,144-45. 

2. "Deposits and Currency — Adjusted Deposits of AH Banks and Currency Out- 
side Banks, 1892-1941," Banking and Monetary Statistics, 1914-1942 (Washington, 
D.C.: Board of Governors of the Federal Reserve System, 1976), p. 34. 


between the political and monetary scientists had performed its 
mission well. 


To finance the early stages of World War I, England and France 
had borrowed heavily from investors in America and had selected 
the House of Morgan as sales agent for their bonds. Morgan also 
acted as their U.S. purchasing agent for war materials, thus profit- 
ing from both ends of the cash flow: once when the money was bor- 
rowed and again when it was spent. Further profits were derived 
from production contracts placed with companies within the 
Morgan orbit. But the war began to go badly for the Allies when 
Germany's submarines took virtual control of the Atlantic shipping 
lanes. As England and France moved closer to defeat or a negotiated 
peace on Germany's terms, it became increasingly difficult to sell 
their bonds. No bonds meant no purchases, and the Morgan cash 
flow was threatened. Furthermore, if the previously sold bonds 
should go into default, as they certainly would in the wake of 
defeat, the Morgan consortium would suffer gigantic losses. 

The only way to save the British Empire, to restore the value of 
the bonds, and to sustain the Morgan cash flow was for the United 
States government to provide the money. But, since neutral nations 
were prohibited from doing that by treaty, America would have to 
be brought into the war. A secret agreement to that effect was made 
between British officials and Colonel House, with the concurrence 
of the President. From that point forward, Wilson began to pressure 
Congress for a declaration of war. This was done at the very time he 
was campaigning for reelection on the slogan "He kept us out of 
war." Meanwhile, Morgan purchased control over major segments 
of the news media and engineered a nation-wide editorial blitz 
against Germany, calling for war as an act of American patriotism. 

Morgan had created an international shipping cartel, including 
Germany's merchant fleet, which maintained a near monopoly on 
the high seas. Only the British Cunard Lines remained aloof. The 
Lusitania was owned by Cunard and operated in competition with 
Morgan's cartel. The Lusitania was built to military specifications 
and was registered with the British Admiralty as an armed auxiliary 
cruiser. She carried passengers as a cover to conceal her real mis- 
sion, which was to bring contraband war materials from the United 
States. This fact was known to Wilson and others in his administra- 



tion, but they did nothing to stop it. When the German embassy 
tried to publish a warning to American passengers, the State 
Department intervened and prevented newspapers from printing i t 
Whenthe Lusitania left New York harbor on her final voyage, she 

was vitually a floating ammunition depot. The British I 
would mean the difference between defeat and victory and any- 
thing that could accomplish that was proper even the coldly calcu- 
lated sacrifice of one of her great ships with E . s n , h » . . aboard. But 
the trick was to have Americans on board also in order to create the 

proper emotional climate in the United States. As the ] 
moved into hostile waters, where a German U-boat was known to 

be operating, First Lord of the Admiralty, Winston CI 
ordered her destroyer protection to abandon her. This, ] 
that she had been ordered to travel at reduced speed, made her an 
easy target. After the impact of one well placed torpedo, a mighty 
second explosion from within ripped her apart, and the ship that 
many believed could not be sunk, gurgled to the bottom m less than 

The deed had been done, and it set in motion great wav 
revulsion against the Germans. These waves eventually flooded 
through Washington and swept the United States into war. Within 
days of the decoration, Congress voted $1 billion in credit for 
England and France. $200 million was sent to England immediately 
and was applied to the Morgan account. The vast quantity of money 
needed to finance the war was created by the Federal Reserve 
System, which means it was collected from Americans through that 

hidden tax called inflation. Within just five years, fully < 

all they had saved. The infinitely higher cost in Americ 
added to the bill. Thus it was that the separate motives c 

diverse personalties as Winston Churchill, J. P. Morj 

House, and Woodrow Wilson all found common cause 

America into World War I. Churchill maneuvered fc 

advantage, Morgan sought the profits of war, House s< 

power, and Wilson dreamed of a chance to dominate a post war 

League of Nations. 


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LU50AN a. St. Mo * 10 AM 

The German 
Embassy attempted 
to place ads in 50 
newspapers warning 
that the Lusitania was 
a target of war, but 
the U.S. government 
prevented them from 
being printed except 
for this one which 
was run in the 
Des Moines Register. 
When the ship was 
sunk off the coast of 
Ireland with 195 
Americans aboard, it 
became the center of 
a national campaign 
to generate emotional 
support for coming 
into the war. 

Chapter Thirteen 


The secret society founded by Cecil Rhodes for the 
purpose of world dominion; the establishment in 
America of a branch of that group called the 
Council on Foreign Relations; the role played by 
financiers representing both of these groups in 
financing the Russian revolution; the use of the 
Red Cross mission in Moscow as a cover for that 

One of the greatest myths of contemporary history is that the 
Bolshevik Revolution in Russia was a popular uprising of the 
downtrodden masses against the hated ruling class of the Tsars. As 
we shall see, however, the planning, the leadership, and especially 
the financing came entirely from outside Russia, mostly from 
financiers in Germany, Britain, and the United States. Furthermore, 
we shall see that the Rothschild Formula played a major role in 
shaping these events. 

This amazing story begins with the war between Russia and 
Japan in 1904. Jacob Schiff, who was head of the New York 
investment firm of Kuhn, Loeb, and Company, had raised the 
capital for large war loans to Japan. It was due to this funding that 
the Japanese were able to launch a stunning attack against the 
Russians at Port Arthur and, the following year, to virtually 
decimate the Russian fleet. In 1905, the Mikado awarded Jacob 
Schiff a medal, the Second Order of the Treasure of Japan, in 
recognition of his important role in that campaign. 

During the two years of hostilities, thousands of Russian 
soldiers and sailors were taken as prisoners. Schiff paid for the 
printing of one-and-a-half tons of Marxist propaganda and had it 
delivered to the prison camps. He also sent scores of Russian- 
speaking revolutionaries, trained in New York, to distribute the 


pamphlets among the prisoners and to indoctrinate them into 
rebellion against their own government. When the war was ended, 
50,000 officers and enlisted men returned home to become virtual 
seeds of treason against the Tsar. They were to play a major role a 
few years later in creating mutiny among the military during the 
Communist takeover of Russia. 


One of the best known Russian revolutionaries at that time was 
Leon Trotsky. In January of 1916, Trotsky was expelled from France 
and came to the United States at the invitation of Schiff . His travel 
expenses aboard the Monserrat were paid by his host. He remained 
for several months while writing for a Russian socialist paper the 
Navy Mir (New World), and giving revolutionary speeches at mass 
meetings in New York City. According to Trotsky himself, on many- 
occasions a chauffeured limousine was placed at the service of his 
family by a wealthy friend identified as Dr. M. In his book, My Life, 
Trotsky wrote: ' 

The doctor's wife took my wife and the boys out driving and was 

very kind to them But she was a mere mortal, whereas the chauffeur 

was a magician, a titan, a superman! With the wave of his hand he 

made the machine obey his slightest command. To sit beside him was 

the supreme delight. When they went into a tea-room, the boys would 
anxiously demand of their mother, "Why doesn't the chauffeur come 

It must have been a curious sight to see the family of the great 
socialist radical, defender of the working class, enemy of capital- 
ism, enjoying the pleasures of tea rooms and chauffeurs, the very 
symbols of capitalist luxury. In any event, it is now known that 
almost all of his expenses in New York, including the mass rallies, 
were paid for by Jacob Schiff. 

On March 23,1917, a mass meeting was held at Carnegie Hall to 
celebrate the abdication of Nicholas H, which meant the overthrow 
of Tsarist rule in Russia. Thousands of socialists, Marxists, nihilists 
and anarchists attended to cheer the event. The following day there 
was published on page two of the New York Times, a telegram from 
Jacob Schiff which had been read to this audience. He expressed 
regrets that he could not attend and then described the successful 

1- Leon Trotsky, My Life (New York: Scribner's, 1930), p. 277. 



Russian revolution as "...what we had hoped and striven for these 
long years." 

In the February 3,1949, issue of the New York Journal American, 
Schiff's grandson, John, was quoted by columnist Cholly Knicker- 
bocker as saying that his grandfather had given about $20 million 
for the triumph of Communism in Russia. 

When Trotsky returned to Petrograd in May of 1917 to organize 
the Bolshevik phase of the Russian Revolution, he carried $10,000 
for travel expenses, a generously ample fund considering the value 
of the dollar at that time. The amount is known with certainty 
because Trotsky was arrested by Canadian and British naval 
personnel when the ship on which he was travelling, the S.S. 
Kristianiafjord, put in at Halifax. The money in his possession is now 
a matter of official record. Because Trotsky was a known enemy of 
the Tsar and because Germany was then at war with Russia, it was 
assumed that the $10,000 was German money given to him in New 
York. The evidence, however, is that this, too, came from Kuhn, 
Loeb and Company. 

Trotsky was not arrested on a whim. He was recognized as a 
threat to the best interests of England, Canada's mother country in 
the British Commonwealth. Russia was an ally of England in the 
First World War which then was raging in Europe. Anything that 
would weaken Russia — and that certainly included internal revolu- 
tion—would be, in effect, to strengthen Germany and weaken 
England. In New York, on the night before his departure, Trotsky 
had given a speech in which he said: "I am going back to Russia to 
overthrow the provisional government and stop the war with 
Germany." 3 Trotsky, therefore, represented a real threat to 
England's war effort. He was arrested as a German agent and taken 
as a prisoner of war. 

With this in mind, we can appreciate the great strength of those 
mysterious forces, both in England and the United States, that 
intervened on Trotsky's behalf. Immediately, telegrams began to 
come into Halifax from such divergent sources as an obscure 

1- "Mayor Calls Pacifists Traitors," The New York Times, March 24,1917, p. 2. 

2. See Anthony C. Sutton, Ph.D., Wall Street and the Bolshevik Revolution (New 
Rochelle, New York: Arlington House, 1974), pp. 21-24. 

3. A full report on this meeting had been submitted to the U.S. Military Intelli- 
gence. See Senate Document No. 62, 66th Congress, Report and Hearings of the 
Subcommittee on the judiciary, United States Senate, 1919, Vol. 11, p. 2680. 

attorney in New York City, from the Canadian Deputy Postmaster- 
General, and even from a high-ranking British military officer all 
inquiring into Trotsky's situation and urging his immediate release 
The head o the British Secret Service in America at the time was Sir 
William Wiseman who, as fate would have it, occupied the 
apartment directly above the apartment of Edward Mandell House 
jmd who had become fast friends with him. House advised 
Wiseman that President Wilson wished to have Trotsky released 
Wiseman advised his government, and the British Admiralty 
issued orders on April 21st that Trotsky was to be sent on his wa J 
It was a fateful decision that would affect, not only the outcome of 
war, but the future of the entire world. 


It would be a mistake to conclude that Jacob Schiff acted alone 
m his drama. Trotsky could not have gone even as far as Halifax 
without having been granted an American passport, and this was 
accomplished by the personal intervention of President Wilson 
Professor Anthony Sutton says: 

President Woodrow Wilson was the fairy godmother who 

forward" the revolution.... At the same time careful State Department 
bureaucrats, concerned about such revolutionaries entering Russia 

were umlaterally attempting to tighten up passport procedures 2 



What emerges from this sampling of events is a clear pattern of 
strong support for Bolshevism coming from the highest financial 
and political power centers in the United States; from men who, 
supposedly, were "capitalists" and who, according to conventional 
wisdom, should have been the mortal enemies of socialism and 

Nor was this phenomenon confined to the United States. 
Trotsky, in his book, My Life, tells of a British financier who, in 1907, 
gave him a "large loan" to be repaid after the overthrow of the 
Tsar. Arsene de Goulevitch, who witnessed the Bolshevik Revolu- 
tion first hand, has identified both the name of the financier and the 
amount of the loan. "In private interviews," he said, "I have been 
told that over 21 million roubles were spent by Lord [Alfred] 
Milner in financing the Russian Revolution.... The financier just 
mentioned was by no means alone among the British to support the 
Russian revolution with large financial donations." Another name 
specifically mentioned by de Goulevitch was that of Sir George 
Buchanan, the British Ambassador to Russia at the time. 1 

It was one thing for Americans to undermine Tsarist Russia 
and, thus, indirectly help Germany in the war, because Americans 
were not then into it, but for British citizens to do so was 
tantamount to treason. To understand what higher loyalty com- 
pelled these men to betray their battlefield ally and to sacrifice the 
blood of their own countrymen, we must take a look at the unique 
organization to which they belonged. 


Lord Alfred Milner was a key figure in organizing a secret 
society which, at the time of these events, was about sixteen years 
old. It was dedicated to nothing less than the quiet domination of 
the world. The conquest of Russia was seen as but the first phase of 
that plan. Since the organization is still in existence today and 
continues to make progress toward its goal, it is important to have 
its history included in this narrative. 

One of the most authoritative reference works on the history of 
this group is Tragedy and Hope by Dr. Carroll Quigley. Dr. Quigley 
Was a professor of history at Georgetown University where Presi- 
dent Clinton had been one of his students. He was the author of the 

1 - See Arsene de Goulevitch, Czarism and Revolution (Hawthorne, California: Omru 
Publications, n.d., rpt. from 1962 French edition), pp. 224, 230. 



widely used textbook. Evolution of Civilization; he was a member of 
the editorial board of the monthly periodical, Current History; and 
he was a frequent lecturer and consultant for such groups as the 
Industrial College of the Armed Forces, the Brookings Institution 
the U.S. Naval Weapons Laboratory, the Naval College, the Smith 
soman Institute, and the State Department. But Dr. Quiqley was no 
mere academic. He also had been closely associated with many of 
the family dynasties of the super-rich. He was, by his own boast, an 

insider with a front row view of the world's money power struc 

When Dr. Quigley wrote his scholarly, 1300-page book of drv 
history, ,t was not intended for the masses. It was to be read by the 
intellectual elite, and to that select readership he cautiously 
exposed one of the best-kept secrets of all time. He also made it 
dear however, that he was a friendly apologist for this group and 
that he supported its goals and purposes. Dr. Quigley said: 

I know of the operation of this network because I have studied it 
tor twenty years and was permitted for two years, in the 1960s to 
examine : its paper sand secret records. I have no a version to it or to 
mo st of its amis and have, for much of my life, been close to it and to many of its 

instruments... In general, my chief difference of opinion is that i 


As mentioned, Quigley's book was intended for an elite reader- 
ship composed of scholars and network insiders. But, unexpect- 
edly, it began to be quoted in the journals of the John Birch Society 
which.correctly Kad perceived that his work.prpvided a valuable _ 

insight to thennner workings of a hidden power structure That 

demand for the, book .bv. people, who 

y Quigley, himself. In a person 



up to $135 arid parts were reprinted in violation of copyright, but I 
could do nothing because I believed the publisher, and he would not 
take action even when a pirate copy of the book appeared. Only when 
I hired a lawyer in 1974 did I get any answers to my questions.... 

In another personal letter, Quigley commented further on the 
duplicity of his publisher: 

They lied to me for six years, telling me that they would reprint 
when they got 2,000 orders, which could never happen because they 
told anyone who asked that it was out of print and would not be 
reprinted. They denied this to me until I sent them Xerox copies of 
such replies in libraries, at which they told me it was a clerk's error. In 
other words, they lied to me but prevented me from regaining 
publication rights.... I am now quite sure that Tragedy and Hope was 

To understand why "powerful people" would want to suppress 
this book, note carefully what follows. Dr. Quigley describes the 
goal of this network of world financiers as: 

... nothing less than to create a world system of financial control in 
private hands able to dominate the political system of each country 
and the economy of the world as a whole. This system was to be 
controlled in a feudalist fashion by the central banks of the world 
acting in concert, by secret agreements arrived at in frequent private 
meetings and conferences.... 

Each central bank, in the hands of men like Montagu Norman 
of the Bank of England, Benjamin Strong of the New York Federal 
Reserve Bank, Charles Rist of the Bank of France, and Hjalmar 
Schacht of the Reichsbank, sought to dominate its government by 
its ability to control treasury loans, to manipulate foreign 
exchanges, to influence the level of economic activity in the 
country, and to influence cooperative politicians by subsequent 
economic rewards in the business world. 

1. These letters were first published in the Summer, 1976, issue of Conspiracy 
Digest, published by Peter McAlpine (Alpine Press, Dearborn, Michigan). The 
originals cannot now be located. However, the author was able to locate the 
attorney, Mr. Paul Wolff (with the firm of Williams & Connolly in Washington, 
D.C.) who represented Quigley in his legal action against the publisher. Mr. Wolff 
cannot vouch for the authenticity of the letters themselves, but has confirmed in 
phone conversations and later in writing that the essentia] details are correct. He 
writes: "It is my recollection that they withheld from me and the Professor for some 
time the information that they had in fact destroyed 'the plates.'" 

2. Quigley, Tragedy, p. 324. 


That is the information that "powerful people" do not want the 
common man to know. 

Notice that Quigley refers to this group as a "network." That is 
a precise choice of words, and it is important to an understanding 
of the forces of international finance. The network to which he 
refers is not the secret society. It is no doubt directed by it, and there 
are society members in key positions within the network, but we 
can be sure that there are many in the network who have little or no 
knowledge of hidden control. To explain how this can be possible, 
let us turn to the origin and growth of the secret society itself. 


In 1870, a wealthy British socialist by the name of John Ruskin 
was appointed as professor of fine arts at Oxford University in 
London. He tfught that the state must take control of the means of 
production and organize them for the good of the community as a 
whole. He advocated placing control of the state into the hands of a 
small ruling class, perhaps even a single dictator. He said: "My 
continual aim has been to show the eternal superiority of some men 
to others, sometimes even of one man to all others." 1 

This, of course, is the same intellectual appeal of Communism. 
Lenin taught that the masses could not be trusted to handle their 
own affairs and that a special group of disciplined intellectuals 
must assume this role for them. That is the function of the 
Communist Party, which never comprises more than about three 
per cent of the population. Even when the charade of free elections 
is allowed, only members of the Party— or those over whom the 
KGB has total control— are permitted to run for office. The concept 
that a ruling party or class is the ideal structure for society is at the 
heart of all collectivist schemes, regardless of whether they are 
called Socialism, Communism, Nazism, Fascism, or any other 
"ism" which may yet be invented to disguise it. It is easy, therefore, 
for adherents of this elitist mentality to be comfortable in almost 
any of these collectivist camps, a fact to which Dr. Quigley alluded 
when he wrote: "This network, which we may identify as the 
Round Table Groups, has no aversion to cooperating with the 
Communists, or any other groups, and frequently does so." 2 

1. See Kenneth Clark, Ruskin Today (New York: Holt, Reinhart & Winston, 1964), 
p. 267. 

2. Quigley, Tragedy, p. 950. 



Returning to the subject of the origins of this group, however, 
Dr. Quigley tells us: 

Ruskin spoke to the Oxford undergraduates as members of the 
privileged ruling class. He told them that they were the possessors of 
a magnificent tradition of education, beauty, rule of law, freedom, 
decency, and self-discipline, but that this tradition could not be saved, 
and did not deserve to be saved, unless it could be extended to the 
lower classes in England itself and to the non-English masses 
throughout the world. 

Ruskin's message had a sensational impact. His inaugural lecture 
was copied out in long-hand by one undergraduate, Cecil Rhodes, 
who kept it with him for thirty years. 

Cecil Rhodes made one of the world's greatest fortunes. With 
the cooperation of the Bank of England and financiers like 
Rothschild, he was able to establish a virtual monopoly over the 
diamond output of South Africa and most of the gold as well. The 
major portion of this vast income was spent to advance the 
ruling-class ideas of John Ruskin. 

Dr. Quigley explains: 

The Rhodes Scholarships, established by the terms of Cecil 
Rhodes' seventh will, are known to everyone. What is not so widely 
known is that Rhodes in five previous wills left his fortune to form a 
secret society, which was to devote itself to the preservation and 
expansion of the British Empire. And what does not seem to be known 
to anyone is that this secret society was created by Rhodes and his 
principal trustee, Lord Milner, and continues to exist to this day.... In 
his book on Rhodes' wills, he [Stead, who was a member of the inner 
circle] wrote in one place: "Mr. Rhodes was more than the founder of 
a dynasty. He aspired to be the creator of one of those vast 
semi-religious, quasi-political associations which, like the Society of 
Jesus, have played so large a part in the history of the world. To be 
more strictly accurate, he wished to found an Order as the instrument 
of the will of the Dynasty. 2 ... 

In this secret society Rhodes was to be leader; Stead, Brett (Lord 
Esher), and Milner were to form an executive committee; Arthur 
(Lord) Balfour, (Sir) Harry Johnston, Lord Rothschild, Albert (Lord) 
Grey, and others were listed as potential members of a "Circle of 
Initiates;" while there was to be an outer circle known as the 

Quigley, Tragedy, p. 130. 
2 - Carroll Quigley, The Anglo-American Establishment: From Rhodes to Cliveden (New 
Y ork: Books in Focus, 1981), pp. ix, 36. 


"Association of Helpers" (later organized by Milner as the Round 
Table organization). 


Here, then, was the classical pattern of political conspiracy. This 
was the structure that made it possible for Quigley to differentiate 
between an international "network" and the secret society within 
that network. At the center, there is always a tiny group in 
complete control, with one man as the undisputed leader. Next is a 
circle of secondary leadership that, for the most part, is unaware of 
an inner core. They are led to believe that they are the inner-most 

In time, as these conspiracies are built from the center out, they 
form additional rings of organization. Those in the outer echelons 
usually are idealists with an honest desire to improve the world. 
They never suspect an inner control for other purposes, and only 
those few who demonstrate a ruthless capacity for higher leader- 
ship are ever allowed to see it. 

After the death of Cecil Rhodes, the inner core of his secret 
society fell under the control of Lord Alfred Milner, Governor- 
General and High Commissioner of South Africa. As director of a 
number of public banks and as corporate precursor of England's 
Midland Bank, he became one of the greatest political and financial 
powers in the world. Milner recruited into his secret society a 
group of young men chiefly from Oxford and Toynbee Hall and, 
according to Quigley: 

Through his influence these men were able to win influential posts 
in government and international finance and became the dominant 
influence in British imperial and foreign affairs up to 1939.... In 
1909-1913 they organized semi-secret groups, known as Round Table 
Groups, in the chief British dependencies and the United States.... 

Money for the widely ramified activities of this organization came 
... chiefly from the Rhodes Trust itself, and from wealthy associates 
such as the Beit brothers, from Sir Abe Bailey, and (after 1915) from the 
Astor family ... and from foundations and firms associated with the 
international banking fraternity, especially the Carnegie United 
Kingdom Trust, and other organizations associated with J. P. Morgan, 
the Rockefeller and Whitney families, and the associates of Lazarc! 
Brothers and of Morgan, Grenfell, and Company.... 

1. Quigley, Tragedy, p. 131. 



At the end of the war of 1914, it became clear that the organization 
of this system had to be greatly extended. Once again the task was 
entrusted to Lionel Curtis who established, in England and each 
dominion, a front organization to the existing local Round Table 
Group. This front organization, called the Royal Institute of 
International Affairs, had as its nucleus in each area the existing 
submerged Round Table Group. In New York it was known as the 
Council on Foreign Relations, and was a front for J. P. Morgan and 
Company in association with the very small American Round Table 
Group. 1 

The Council on Foreign Relations was a spin-off from the 
failure of the world's leaders at the end of World War I to embrace 
the League of Nations as a true world government. It became clear 
to the master planners that they had been unrealistic in their 
expectations for rapid acceptance. If their plan were to be carried 
forward, it would have to be done on the basis of patient gradual- 
ism symbolized by the Fabian turtle. Rose Martin says: 

Colonel House was only one man, where a multitude was needed. 
He had set the pattern and outlined goals for the future, and he still 
had a scheme or two in mind. In particular, he foresaw it would be 
necessary for the Fabians to develop a top level Anglo-American 
planning group in the field of foreign relations which could secretly 
influence policy on the one hand and gradually "educate" public 
opinion on the other.... 

To the ambitious young Fabians, British and American, who had 
flocked to the peace conference as economists and junior officials, it 
soon became evident that a New World Order was not about to be 
produced at Paris.... For them, Colonel House arranged a dinner 
meeting at the Hotel Majestic on May 19,1919, together with a select 
group of Fabian-certified Englishmen — notably, Arnold Toynbee, 
R.H. Tawney and John Maynard Keynes. All were equally 
disillusioned, for various reasons, by the consequences of the peace. 
They made a gentlemen's agreement to set up an organization, with 
branches in England and America, "to facilitate the scientific study of 
international questions." As a result two potent and closely related 
opinion-making bodies were founded.... The English branch was 
called the Royal Institute of International Affairs. The American 
branch, first known as the Institute of International Affairs, was 
reorganized in 1921 as the Council on Foreign Relations. 2 

L Quigley, Tragedy, pp. 132,951-52. 
2 - Martin, pp. 174-5. 



It is through this front group, called the Council on Foreign 
Relations, and its influence over the media, tax-exempt founda- 
tions, universities, and government agencies that the international 
financiers have been able to dominate the domestic and foreign 
policies of the United States ever since. 

We shall have more to say about the CFR, but our focal point 
for now is Great Britain and, in particular, the help given to 
Communism in Russia by Lord Alfred Milner and his web of secret 


In Russia, prior to and during the revolution, there were many 
local observers, tourists, and newsmen who reported that British 
and American agents were everywhere, particularly in Petrograd, 
providing money for insurrection. One report said, for example, 
that British agents were seen handing out 25-rouble notes to the 
men at the Pavlovski regiment just a few hours before it mutinied 
against its officers and sided with the revolution. The subsequent 
publication of various memoirs and documents made it clear that 
this funding was provided by Milner and channeled through Sir 
George Buchanan who was the British Ambassador to Russia at 
that time. 1 It was a repeat of the ploy that had worked so well for 
the cabal many times in the past. Round Table members were once 
again working both sides of the conflict to weaken and topple a 
target government. Tsar Nicholas had every reason to believe that, 
since the British were Russia's allies in the war against Germany, 
British officials would be the last persons on Earth to conspire 
against him. Yet, the British Ambassador himself represented the 
hidden group which was financing the regime's downfall. 

The Round Table agents from America did not have the 
advantage of using the diplomatic service as a cover and, therefore, 
had to be considerably more ingenious. They came, not as diplo- 
mats or even as interested businessmen, but disguised as Red Cross 
officials on a humanitarian mission. The group consisted almost 
entirely of financiers, lawyers, and accountants from New York 
banks and investment houses. They simply had overpowered the 
American Red Cross organization with large contributions and, in 

1. See de Goulevitch, p. 230. 



effect, purchased a franchise to operate in its name. Professor 
Sutton tells us: 

The 1910 [Red Cross] fund-raising campaign for $2 million, for 
example, was successful only because it was supported by these 
wealthy residents of New York City. J. P. Morgan himself contributed 
$100,000.... Heriry P. Davison [a Morgan partner] was chairman of the 
1910 New York Fund-Raising Committee and later became chairman 
of the War Council of the American Red Cross.... The Red Cross was 
unable to cope with the demands of World War I and in effect was 
taken over by these New York bankers. 1 

For the duration of the war, the Red Cross had been made, 
nominally, a part of the armed forces and subject to orders from the 
proper military authorities. It was not clear who these authorities 
were and, in fact, there were never any orders, but the arrangement 
made it possible for the participants to receive military commis- 
sions and wear the uniform of American army officers. The entire 
expense of the Red Cross Mission in Russia, including the purchase 
of uniforms, was paid for by the man who was appointed by 
President Wilson to become its head, "Colonel" William Boyce 

Thompson was a classical specimen of the Round Table net- 
work. Having begun his career as a speculator in copper mines, he 
soon moved into the world of high finance. He refinanced the 
American Woolen Company and the Tobacco Products Company; 
launched the Cuban Cane Sugar Company; purchased controlling 
interest in the Pierce Arrow Motor Car Company; organized the 
Submarine Boat Corporation and the Wright-Martin Aeroplane 
Company; became a director of the Chicago Rock Island & Pacific 
Railway, the Magma Arizona Railroad, and the Metropolitan Life 
Insurance Company; was one of the heaviest stockholders in the 
Chase National Bank; was the agent for J.P. Morgan's British 
securities operation; became the first full-time director of the 
Federal Reserve Bank of New York, the most important bank in the 
Federal Reserve System; and, of course, contributed a quarter- 
million dollars to the Red Cross. 

When Thompson arrived in Russia, he made it clear that he was 
not your typical Red Cross representative. According to Hermann 
Hagedorn, Thompson's biographer: 

1. Sutton, Revolution, p. 72. 


He deliberately created the kind of setting which would be 
expected of an American magnate: established himself in a suite in the 
Hotel de l'Europe, bought a French limousine, went dutifully to 
receptions and teas and evinced an interest in objects of art. Society 
and the diplomats, noting that here was a man of parts and power, 
began to flock about him. He was entertained at the embassies, at the 
houses of Kerensky's ministers. It was discovered that he was a 
collector, and those with antiques to sell fluttered around him, offering 
him miniatures, Dresden china, tapestries, even a palace or two. 1 

When Thompson attended the opera, he was given the imperial 
box. People on the street called him the American Tsar. And it is 
not surprising that, according to George Kennan, "He was viewed 
by the Kerensky authorities as the 'real' ambassador of the United 
States." 2 

It is now a matter of record that Thompson syndicated the 
purchase on Wall Street of Russian bonds in the amount of 
ten-million roubles. In addition, he gave over two-million roubles 
to Aleksandr Kerensky for propaganda purposes inside Russia 
and, with J. P. Morgan, gave the rouble equivalent of one-million 
dollars to the Bolsheviks for the spreading of revolutionary propa- 
ganda outside of Russia, particularly in Germany and Austria. A 
photograph of the cablegram from Morgan to Thompson advising 
that the money had been transferred to the National City Bank 
branch in Petrograd is included in this book. 


At first it may seem incongruous that the Morgan group would 
provide funding for both Kerensky and Lenin. These men may 
have both been socialist revolutionaries, but they were miles apart 
in their plans for the future and, in fact, were bitter competitors for 
control of the new government. But the tactic of funding both sides 
in a political contest by then had been refined by members of the 

1. Hermann Hagedorn, The Magnate: William Boyce Thompson and His Time (New 
York: Reynal & Hitchcock, 1935), pp. 192-93. 

2. George F. Kennan, Russia Leaves the War: Soviet-American Relations, 1917-1920 
(Princeton, New Jersey: Princeton University Press, 1956), p. 60 

3. Hagedorn, p. 192. 

4. Sutton, Revolution, pp. 83,91. It was the agitation made possible by this funding 
that led to the abortive German Sparticus Revolt of 1918. See "W.B. Thompson, Red 
Cross Donor, Believes Party Misrepresented," Washington Post, Feb. 2,1918. 



Round Table into a fine art. A stunning example of this occurred in 
South Africa during the outset of Boer War in 1899. 

The British and Dutch had been active in the settlement of 
Southern Africa for decades. The Dutch had developed the prov- 
inces of Transvaal and the Orange Free State, while the British had 
colonized such areas as Rhodesia, Cape Hope, Basutoland, 
Swaziland, and Bechuanaland. Conflict was inevitable between 
these two groups of settlers whenever they found themselves in 
competition for the resources of the same territory, but it was the 
discovery of gold in the Whitewater area of the Transvaal that 
provided the motive for war. 

Politically, the Transvaal was in the hands of the Boers, who 
were the descendants of the Dutch settlers. But, after the discovery 
of gold in that area, the mine fields had been developed primarily 
by the British and became solidly under their control. Not surpris- 
ingly, one of the largest players in that game was Cecil Rhodes who 
already had monopolized the diamond fields under British control 
to the South. Historian Henry Pike tells us: 

With the discovery of gold in the Transvaal, Rhodes' greed 
became passionate. His hatred of Paul Kruger, the Afrikaner President 
of the Transvaal, knew no limits. He was bitterly opposed to Kruger's 
independent Transvaal, and viewed this as the main obstacle to his 
efforts to sweep all Southern Africa under British rule. 1 

In 1895, Rhodes set in motion a plan to overthrow Kruger's 
government by organizing an uprising among the British inhabi- 
tants in Johannesburg. The uprising was financed by himself and 
was to be led by his brother, Frank, and other loyal supporters. This 
was to be followed by a military invasion of the Transvaal by 
British troops from Bechuanaland and Rhodesia led by Sir Leander 
Jameson. The uprising fizzled and ended in Jameson's arrest and 
public disgrace. 

But Rhodes was determined to have the Transvaal, and began 
immediately to prepare a second, more patient ploy. Through 
Rhodes' influence, Lord Alfred Milner was appointed as the British 
High Commissioner of South Africa. In London, Lord Esher — 
another member of the secret society— became the chief political 
adviser to King Edward and was in daily contact with him 

1. Heniy R. Pike, Ph.D., A History of Communism in South Africa (Germiston, South 
Africa: Christian Mission International of South Africa, 1985), p. 39. 


throughout this period. That took care of the British side of this 
contest. With regard to the Boers' side, Professor Quigley tells the 
amazing story: 

By a process whose details are still obscure, a brilliant young 
graduate of Cambridge, Jan Smuts, who had been a vigorous 
supporter of Rhodes and acted as his agent in Kimberly [South 
Africa's largest diamond mine] as late as 1895 and who was one of the 
most important members of the Rhodes-Milner group in the period 
1908-1950, went to the Transvaal and, by violent anti-British agitation, 
became state secretary of that country (although a British subject) and 
chief political adviser to President Kruger; Milner made provocative 
troop movements on the Boer frontiers in spite of the vigorous protests 
of his commanding general in South Africa, who had to be removed; 
and, finally, war was precipitated when Smuts drew up an ultimatum 
insisting that the British troop movements cease and when this was 
rejected by Milner. 1 

And so, as a result of careful engineering by Round Table 
members on both sides — one making outrageous demands and the 
other responding to those demands in pretended indignation— the 
war finally began with a British invasion in October of 1899. After 
21/2 years of fierce fighting, the Boers were forced to surrender, and 
Milner administered the former republic as a militarily occupied 
territory. Round Table members, known to the public as "Milner's 
Kindergarten," were placed into all key government posts, and the 
gold fields were finally secured. 


On the other side of the world, in New York City, the same 
tactic of playing both sides against each other was being applied 
with brilliant precision by Round Table member J. P. Morgan. 
Professor Quigley tells us: 

To Morgan all political parties were simply organizations to be 
used, and the firm always was careful to keep a foot in all camps. 
Morgan himself, Dwight Morrow, and other partners were allied with 
Republicans; Russell C. Leffingwell was allied with the Democrats; 
Grayson Murphy was allied with the extreme Right; and Thomas W. 
Lamont was allied with the Left. 2 

1. Quigley, Tragedy, pp. 137-38. 

2. Ibid., p. 945. 



Although it is true that Thomas Lamont was the father of 
Corliss Lamont, a well-known Communist, and was himself widely 
regarded as a man of leftist persuasions, it must also be remem- 
bered that he felt equally at home among the Fascists and, in fact, 
served as an unofficial business consultant for Mussolini in the 

At the same time that Morgan was funding pro-Bolshevik 
groups, he founded what was probably the most virulent anti- 
Bolshevik organization ever to exist in America. It was called 
United Americans and it set about to frighten everyone into 
believing that a Red mob was at that very moment poised to 
capture New York City. It issued shocking reports warning about a 
pending financial collapse, widespread starvation, and a desperate 
working class being maneuvered into accepting Communist slo- 
gans and rhetoric as a last resort. Ironically, the officers of this 
organization were Allen Walker of the Guarantee Trust Company, 
which was then acting as the Soviet's fiscal agent in the U.S.; Daniel 
Willard, president of the Baltimore & Ohio Railway, which was 
then active in the development of Soviet railways; H.H. Westing- 
house of Westinghouse Air Brake Company which was then 
operating a major plant in Russia; and Otto H. Kahn of Kuhn, Loeb 
& Company, which was one of the principal financial backers of the 
fledgling Soviet regime. 2 

Even inside Russia itself, the Round Table was spreading its 
bets. In addition to the funding, previously mentioned, which was 
given to the Bolsheviks and to their opponents, the Mensheviks, 
Morgan also financed the military forces of Admiral Kolchak who 
was fighting against the Bolsheviks in Siberia. Not surprisingly, 
Kolchak also received funding from a consortium of British finan- 
ciers, including Alfred Milner. 

It is commonly stated that the original intent of the Red Cross 
mission to Moscow was to prevent the Russian government from 
making a separate peace with Germany which would release 
German troops to fight against England and France. According to 
that version of the story— which portrays the actors as patriots 

1. See John P. Diggins, Mussolini and Fascism: The View from America (Princeton, 
New Jersey: Princeton University Press, 1972). 

2. Sutton, Revolution, pp. 163-68. 

3. Ibid., pp. 102,146,166-67. 


merely doing what was best for the war effort— the first goal was to 
support the Tsar. When the Tsar was overthrown, they supported 
the Mensheviks because they had pledged to stay in the war. When 
the Mensheviks were ousted, they continued to support the 
Bolsheviks in order to gain sufficient influence to convince them 
not to give aid to Germany. It takes a great deal of gullibility to 
swallow that line. A far more plausible reading is that the Morgan 
interests were merely doing what they had always done: placing 
bets on all horses so that, no matter which one crossed the finish 
line, the winner would be obligated to them. 


After the Bolsheviks had seized power in Russia, Sir George 
Buchanan was recalled as the British Ambassador and replaced by 
a member of Milner's Kindergarten, a young man by the name of 
Bruce Lockhart. In his book, British Agent, Lockhart describes the 
circumstances of his assignment. Speaking of a meeting with Prime 
Minister Lloyd George, he wrote: 

I saw that his own mind was made up. He had been greatly 
impressed, as Lord Milner told me afterwards, by an interview with 
Colonel Thompson of the American Red Cross, who had just returned 
from Russia and who had denounced in blunt language the folly of the 
Allies in not opening up negotiations with the Bolsheviks.... 

Three days later all my doubts were put at rest. I was to go to 
Russia as head of a special mission to establish unofficial relations with 
the Bolsheviks.... I had been selected for this Russian mission not by 
the Foreign Secretary but by the War Cabinet— actually by Lord 
Milner and Mr. Lloyd George.... 

Lord Milner I saw almost daily. Five days before my departure I 
dined alone with him at Brook's. He was in his most inspiring mood. 
He talked to me with a charming frankness about the war, about the 
future of England, about his own career, and about the opportunities 
of youth— He was, too, very far from being the Jingo and the 
Conservative reactionary whom popular opinion at one time 
represented him to be. On the contrary, many of his views on society 
were startling modem. He believed in the highly organized state, in 
which service, efficiency, and hard work were more important than 
titles or money-bags. 1 

1. R.H. Bruce Lockhart, British Agent (New York and London: G.P. Putnam's Sons, 
1933), pp. 198-99,204,206-07. 




When Thompson returned to the United States, the man he 

selected to replace himself as head of the American Red Cross 

Mission was his second-in-command, Raymond Robins. Not much 

is known about Robins except that he was the protege of Col. 

Edward Mandell House, and he might have remained an obscure 

player in this drama had it not been for the fact that he became one 

of the central characters in Bruce Lockhart's book. It is there that we 

get this inside view: 

Another new acquaintance of these first days in the Bolshevized 
St Petersburg was Raymond Robins, the head of the American Red 
Cross Mission.... He had been a leading figure in Roosevelt's "Bull 
Moose" campaign for the American Presidency in 1912. Although a 
rich man himself, he was an anti-capitalist.... Hitherto, his two heroes 
had been Roosevelt and Cecil Rhodes. Now Lenin had captured his 
imagination.... Robins was the only man whom Lenin was always 
willing to see and who ever succeeded in imposing his own 
personality on the unemotional Bolshevik leader. 

In a less official sense Robins had a similar mission to my own. He 
was the intermediary between the Bolsheviks and the American 
Government and had set himself the task of persuading President 
Wilson to recognize the Soviet regime. 

What an amazing revelation is contained in those words. First, 
we learn that Robins was a leader in the team effort that threw the 
election of 1912 to Woodrow Wilson. Then we learn that he was an 
anti-capitalist. Third, we discover that an anti-capitalist can hero- 
worship Cecil Rhodes. Then we see the tremendous power he 
wielded over Lenin. And finally, we are told that, although he was 
part of a private group financed by Wall Street bankers, he was in 
reality the intermediary between the Bolsheviks and the American 
Government. One will look in vain for a better summary. 

The fact that Cecil Rhodes was one of Robin's great heroes has 
special significance for this story. It was not merely an intellectual 
infatuation from college days. On the night before he left Russia, 
Robins dined with Lockhart. Describing the occasion, Lockhart 
says: "He had been reading Rhodes' life and after dinner he gave us 
a wonderful exposition of Rhodes' character." Thus, both Lockhart 

1. Lockhart, p. 220. 

2. Ibid., p. 270. 


and Robins were dedicated disciples of Cecil Rhodes and both were 
undoubtedly part of the international network to which Professor 
Quigley alluded — possibly even members of the Round Table. 
Lockhart reported to the British group while Robins reported to the 
American group, but both were clearly working for identical 
objectives and doing the work of the unseen hand. 

The Bolsheviks were well aware of the power these men 
represented, and there was no door closed to them. They were 
allowed to attend meetings of the Central Executive Committee 1 , 
and were consulted regarding important decisions. 2 But perhaps 
the best way to appraise the extent of the influence these "capital- 
ists" had over the "anti-capitalists" is to let Lockhart tell his own 
story. In his memoirs, he wrote: 

I returned from our interview to our flat to find an urgent message 
from Robins requesting me to come to see him at once. I found him in 
a state of great agitation. He had been in conflict with Saalkind, a 
nephew of Trotsky and then Assistant Commissar for Foreign Affairs. 
Saalkind had been rude, and the American, who had a promise from 
Lenin that, whatever happened, a train would always be ready for him 
at an hour's notice, was determined to exact an apology or to leave the 
country. When I arrived, he had just finished telephoning to Lenin. He 
had delivered his ultimatum, and Lenin had promised to give a reply 
within ten minutes. I waited, while Robins fumed. Then the telephone 
rang and Robins picked up the receiver. Lenin had capitulated. 
Saalkind was dismissed from his post. But he was an old member of 
the Party. Would Robins have any objection if Lenin sent him as a 
Bolshevik emissary to Berne? Robins smiled grimly. "Thank you, Mr. 
Lenin," he said. "As I can't send the son of a bitch to hell, 'bum' is the 
next best thing you can do with him." 3 

Such was the raw power over the leaders of Communism that 
was concealed behind the innocent facade of the American Red 
Cross Mission. And yet, the world— even today— has no inkling of 
its reality. It has been a carefully guarded secret, and even many of 
those who were close to it were unable to see it. The assistant to 
William Thompson in Russia was Cornelius Kelleher. In later years, 
reflecting on the naivete of Dr. Franklin Billings, who was head of 
the mission's medical team, Kelleher wrote: 

1. Ibid., p. 253. 

2. U.S. State Dept. Decimal File, 861.00/3449. 

3. Lockhart, pp. 225-26. 



Poor Mr. Billings believed he was in charge of a scientific mission 
for the relief of Russia.... He was in reality nothing but a mask — the 
Red Cross complexion of the mission was nothing but a mask. 1 

The purpose of a mask, of course, is to conceal. And so we are 
led to ask the question, what was behind that mask? What were the 
true motives and goals of the masqueraders? 

We shall turn to that subject next. 


The Bolshevik revolution was not a spontaneous uprising of the 
masses. It was planned, financed, and orchestrated by outsiders. 
Some of the financing came from Germany which hoped that 
internal problems would force Russia out of the war against her. 
But most of the money and leadership came from financiers in 
England and the United States. It was a perfect example of the 
Rothschild formula in action. 

This group centered mainly around a secret society created by 
Cecil Rhodes, one of the world's wealthiest men at the time. The 
purpose of that group was nothing less than world dominion and 
the establishment of a modern feudalist society controlled by the 
world's central banks. Headquartered in England, the Rhodes 
inner-most directorate was called the Round Table. In other coun- 
tries, there were established subordinate structures called Round- 
Table Groups. The Round-Table Group in the United States became 
known as the Council on Foreign Relations. The CFR, which was 
initially dominated by J. P. Morgan and later by the Rockefellers, is 
the most powerful group in America today. It is even more 
powerful than the federal government, because almost all of the 
key positions in government are held by its members. In other 
words, it is the United States government. 

Agents of these two groups cooperated closely in pre-revolu- 
tionary Russia and particularly after the Tsar was overthrown. The 
American contingent in Russia disguised itself as a Red Cross 
mission allegedly doing humanitarian work. Cashing in on their 
close friendship with Trotsky and Lenin, they obtained profitable 
business concessions from the new government which returned 
their initial investment many times over. 

1. Kennan, Russia, p. 59. 

Courtesy of Edward Wardell 

Above is the "Red Cross Mission" in Moscow shortly after the Bolshevik 
Revolution. (L-R) J.W. Andrews, Raymond Robins, Allen Wardell, D. Heywood 
Hardy. Under the pretense of humanitarianism, the Misson's key personnel were 
Wall Street financiers following their own agenda for acquiring profitable 
commercial concessions from the new government. They heavily financed all 
factions of the revolutionary movement to be sure of gaining influence with 
whatever group should come out on top. 

Below is a cablegram from J. P. Morgan to William Boyce Thompson-head of the 
Red Cross Mission prior to Robins-advising that one million dollars had been 
transferred to Thompson via the National City Bank. There were many such 
infusions of "Capitalist" money into the new Communist regime. The process 
continues to this day. 


Chapter Fourteen 


The coup d'etat in Russia in which the Bolshevik 
minority seized control from the revolutionary 
majority; the role played by New York financiers, 
masquerading as Red Cross officials, in support- 
ing the Bolsheviks; the unbroken record since then 
of American assistance in building Russia's war- 
making potential; the emergence of a "credible 
enemy" in accordance with the Rothschild 

In the previous section we saw that the Red Cross Mission in 
revolutionary Russia was, in the words of its own personnel, 
"nothing but a mask." This leads to the logical question, what were 
the true motives and goals that were hidden behind that mask. 

In later years, it would be explained by the participants 
themselves that they simply were engaged in a humanitarian effort 
to keep Russia in the war against Germany and, thus, to help the 
cause of freedom for England and her allies. For Jacob Schiff and 
other Jewish financiers in New York, there was the additional 
explanation that they opposed the Tsar because of his anti- 
Semitism. These, of course, are admirable motives, and they have 
been uncritically accepted by mainstream historians ever since. 
Unfortunately, the official explanations do not square with the 


The facts are that there were two revolutions in Russia that 
year, not one. The first, called the February Revolution, resulted in 
the establishment of a provisional socialist government under the 
leadership of Aleksandr Kerensky. It was relatively moderate in its 
policies and attempted to accommodate all revolutionary factions 
including the Bolsheviks who were the smallest minority. When 


the February Revolution occurred, neither Lenin nor Trotsky were 
even in Russia. Lenin was in Switzerland and didn't arrive until 
April. Trotsky was still in New York writing propaganda and 
giving speeches. 

The second revolution, called the October Revolution, was the 
one through which the Bolsheviks came to power. It was, in fact, no 
revolution at all. It was a coup d'etat. The Bolsheviks simply took 
advantage of the confusion and indecisiveness that existed among 
the various groups that comprised the new government and caught 
them by surprise with a lightening strike of force. With a combina- 
tion of bribes and propaganda, they recruited several regiments of 
soldiers and sailors and, in the early morning darkness of October 
25, methodically took military possession of all government build- 
ings and communication centers. No one was prepared for such 
audacity, and resistance was almost non-existent. By dawn, with- 
out the Russian people even knowing what had happened— much 
less having any voice in that action, their country had been captured 
by a minority faction and become the world's first so-called 
"people's republic." Within two days, Kerensky had fled for his 
life, and all Provisional Government ministers had been arrested. 
That is how the Communists seized Russia and that is how they 
held it afterward. Contrary to the Marxian myth, they have never 
represented the people. They simply have the guns. 

The basic facts of this so-called revolution are described by 
Professor Leonard Schapiro in his authoritative work, The Russian 
Revolutions of 1917: 

All the evidence suggests that when the crisis came the great 
majority of units of the Petrograd Garrison did not support the 
government but simply remained neutral.... The Cossack units 
rejected its call for support, leaving the government with only a few 
hundred women soldiers and around two thousand military cadets on 
its side. The Bolsheviks, on the other hand, could count on several 
regiments to carry out their orders. Units of the Baltic Fleet also 
supported them.... 

In the event, the Bolshevik take-over was almost bloodless: in 
contrast with what had happened in February, nothing could have 
been less like a city in the throes of revolution than Petrograd on 25 
October. Crowds of well-dressed people thronged the streets in the 
evening. Theaters and restaurants were open, and at the opera, 
Shaliapin sang in Boris Godunov. The principal stations and services 



had all been taken over by the morning of 25 October without a shot 
being fired.... 

A battleship and several cruisers, including the Aurora, had 
reached Petrograd from Kronstadt and were anchored with their guns 
trained on targets in the city.... 

The Provisional Government inside the Winter Palace. ..received 
an ultimatum calling for surrender of its members, under threat of 
bombardment of the palace by Aurora and by the guns of the Peter and 
Paul Fortress.... It was only at 9:40 P.M. that the Aurora was ordered to 
fire — and discharged one blank shell. The main effect of this was to 
accelerate the thinning out of the cadet defenders of the palace, who 
had already begun to dwindle. The women soldiers, who had formed 
part of its defense force, also left before the palace was invaded. At 
11 P.M. some live shells were fired, and the palace was slightly 

The story of the dramatic storming of the Winter Palace, popular 
with Soviet historians and in the cinema, is a myth. At around 2 A.M. on 
26 October, a small detachment of troops, followed by an unruly 
crowd and led by two members of the MRC [Military Revolutionary 
Committee], entered the palace. The remaining officer cadets were, 
apparently, prepared to resist, but were ordered to surrender by the 
ministers. In the end, the total casualties were three officer cadets 
wounded. 1 


Eugene Lyons had been a correspondent for United Press in 
revolutionary Russia. He began his career as highly sympathetic to 
the Bolsheviks and their new regime, but six years of actual living 
inside the new socialist Utopia shattered his illusions. In his 
acclaimed book, Workers' Paradise Lost, he summarizes the true 
meaning of the October Revolution: 

Lenin, Trotsky, and their cohorts did not overthrow the 
monarchy. They overthrew the first democratic society in Russian 
history, set up through a truly popular revolution in March, 1917.... 

They represented the smallest of the Russian radical movements 

But theirs was a movement that scoffed at numbers and frankly 
mistrusted the multitudes. The workers could be educated for their 
role after the revolution; they would not be led but driven to their 
terrestrial heaven. Lenin always sneered at the obsession of competing 
socialist groups with their "mass base." "Give us an organization of 

h Leonard Shapiro, The Russian Revolutions of 1917 (New York: Basic Books, 1984), 
pp. 135-36. 


professional revolutionaries," he used to say, "and we will turn Russia 
upside down."... 

Even these contingents were pathetically duped, having not the 
remotest notion of the real purposes for which they were being used. 
They were striking out, they thought, for the multi-party Soviets, for 
freedom, equality, and other goals which their organizers regarded as 
emotional garbage.... 

On the brink of the dictatorship, Lenin dared to promise that the 
state will fade away, since "all need of force will vanish." Not at some 
remote future, but at once: "The proletarian state begins to wither 
immediately after its triumph, for in a classless society a state is 
unnecessary and impossible.... Soviet power is a new kind of state, in 
which there is no bureaucracy, no police, no standing army." Also: "So 
long as the state exists, there is no freedom. When there is freedom, 
there will be no state." 

Within a few months after they attained power, most of the tsarist 
practices the. Leninists had condemned were revived, usually in more 
ominous forms: political prisoners, convictions without trial and 
without the formality of charges, savage persecution of dissenting 
views, death penalties for more varieties of crime than in any other 
modern nation. The rest were put into effect in the following years, 
including the suppression of all other parties, restoration of the 
internal passport, a state monopoly of the press, along with repressive 
practices the monarchy had outlived for a century or more. 1 

All of this, of course, is a departure from the main narrative, but 
it has been necessary to illustrate a fact that has been obscured by 
the passage of time and the acceptance of myth by mainstream 
historians. The fact is that Lenin and Trotsky were not sent to 
Russia to overthrow the anti-Semitic Tsar. Their assignment from 
Wall Street was to overthrow the revolution. 


That this was the prevailing motive of the New York money 
powers was clearly brought to light in the diary of Lincoln Steffens, 
one of America's best-known leftist writers of that time. Steffens 
was on board the S.S. Kristianiafjord when Trotsky was taken off 
and arrested in Halifax. He carefully wrote down the conversations 
he had with other passengers who also were headed to strife-torn 
Russia. One of these was Charles Crane, vice president of the Crane 
Company. Crane was a backer of Woodrow Wilson and former 

1. Eugene Lyons, Workers' Paradise Lost (New York: Funk & Wagnalls, 1967) 
pp. 13-29. 


chairman of the Democratic Party's finance committee. He also had 
organized the Westinghouse Company in Russia and had made no 
less than twenty-three prior visits. His son, Richard Crane, was 
confidential assistant to then Secretary of State, Robert Lansing. It is 
instructive, therefore, to read Steffens' notes regarding the views of 
these traveling companions. He wrote: "... all agree that the 
revolution is in its first phase only, that it must grow. Crane and the 
Russian Radicals on the ship think we shall be in Petrograd for the 

Precisely. Re-revolution was the expectation and the goal, not 
the elimination of anti-Semitism. 

With regard to Thompson's claim that he was merely trying to 
keep Russia in the war against Germany, here again, the logic of 
actual events speak against it. Kerensky and the provisional 
government were/or the war effort. Yet, the Red Cross masquerad- 
ers eventually threw their strongest support to the Bolsheviks who 
were against it. Their excuse was that it was obvious the Bolsheviks 
would soon control the new government and they were merely 
looking to the future. They did not like the Bolsheviks, they said, 
but had to deal with them pragmatically. So they became staunch 
supporters merely to gain influence with the inevitable victors and, 
hopefully, to persuade them to change their position on the war. 

Alas, it didn't work out that way. Influence they had, as we 
have seen, but the Bolsheviks never wavered in their views. After 
seizing control in the October coup d'etat, they did exactly what they 
claimed all along they would do. They signed a peace treaty with 
Germany and confiscated private property. They also began one of 
the world's greatest bloodbaths to eliminate their opposition. None 
of this could be blamed on the masqueraders, you understand. It 
was all the fault of Wilson and the other politicians at home who, 
by not following Thompson's recommendation to send U.S. tax 
dollars to the Bolsheviks, forced them into such drastic action. That, 
at least, is the accepted view. 

In reality, a Bolshevik victory at that time was anything but 
certain, and there was little reason— beyond the support given by 
the New York financiers themselves — to believe they would 
become the dominant voice of Russia. But, even if we grant the 

1. Lincoln Steffens, The Letters of Lincoln Steffens (New York: Harcourt, Brace, 1941), 
p. 396. 


assumption that these men were unusually astute political 
observers who were truly able to foresee the future course, we are 
still faced with serious obstacles, not the least of which are the 
thoughts and words of the masqueraders themselves. For example, 
in February of 1918, Arthur Bullard was in Russia as head of the 
Russian branch of the Committee on Public Information, which was 
the war-propaganda arm of the U.S. government. Bullard was aptly 
described by historian George Kennan as a "liberal socialist, free 
lance writer, and private eye of Colonel House." 1 In his official 
capacity he had many occasions to consult with Raymond Robins 
and, in a report describing one of these conversations, Bullard 

He [Robins] had one or two reservations — in particular, that 
recognition of the Bolsheviks was long overdue, that it should have 
been effected immediately, and that had the U.S. so recognized the 
Bolsheviks, "I believe that we would now be in control of the surplus 
resources of Russia and have control officers at all points on the 
frontier." 2 


The following year, the U.S. Senate conducted an investigation 
into the role played by prominent American citizens in supporting 
the Bolshevik's rise to power. One of the documents entered into 
the record was an early communique from Robins to Bruce 
Lockhart. In it Robins said: 

You will hear it said that I am an agent of Wall Street; that I am the 
servant of William B. Thompson to get Altai Copper for him; that I 
have already got 500,000 acres of the best timber land in Russia for 
myself; that I have already copped off the Trans-Siberian Railway; that 
they have given me a monopoly of the platinum in Russia; that this 
explains my working for the soviet.... You will hear that talk Now, I 
do not think it is true, Commissioner, but let us assume it is true. Let us 
assume that I am here to capture Russia for Wall Street and American 
business men. Let us assume that you are a British wolf and I arn an 
American wolf, and that when this war is over we are going to eat each 
other up for the Russian market; let us do so in perfectly frank, man 
fashion, but let us assume at the same time that we are fairly intelligent 

1. George F. Kennan, The Decision to Intervene: Soviet-American Relations, 1917-1920 
(Princeton, New Jersey: Princeton University Press, 1958), pp. 190, 235. 

2. Bullard ms, U.S. State Dept. Decimal File, 316-11-1265, March 19,1918. 



wolves, and that we know that if we do not hunt together in this hour 
the German wolf will eat us both up. 

Professor Sutton has placed all this into perspective. In the 
following passage, he is speaking specifically about William 
Thompson, but his remarks apply with equal force to Robins and 
all of the other financiers who were part of the Red Cross Mission 
in Russia. 

Thompson's motives were primarily financial and commercial. 
Specifically, Thompson was interested in the Russian market, and how 
this market could be influenced, diverted, and captured for postwar 
exploitation by a Wall Street syndicate, or syndicates. Certainly 
Thompson viewed Germany as an enemy, but less a political enemy 
than an economic or a commercial enemy. German industry and 
German banking were the real enemy. To outwit Germany, Thompson 
was willing to place seed money on any political power vehicle that 
would achieve his objective. In other words, Thompson was an 
American imperialist fighting against German imperialism, and this 
struggle was shrewdly recognized and exploited by Lenin and 

Thompson was not a Bolshevik; he was not even pro-Bolshevik. 
Neither was he pro-Kerensky. Nor was he even pro-American. The 

overriding motivation was the capturing of the postwar Russian market. This 

was a commercial objective. Ideology could sway revolutionary 
operators like Kerensky, Trotsky, Lenin et al., but not financiers. 

Did the wolves of the Round Table actually succeed in their 
goal? Did they, in fact, capture the surplus resources of Russia? The 
answer to that question will not be found in our history books. It 
must be tracked down along the trail of subsequent events, and 
what we must look for is this. If the plan had not been successful, 
we would expect to find a decline of interest on the part of high 
finance, if not outright hostility. On the other hand, if it did succeed, 
we would expect to see, not only continued support, but some 
evidence of profit taking by the investors, a payback for their 
efforts and their risk. With those footprints as our guide, let us turn 
now to an overview of what has actually happened since the 
Bolsheviks were assisted to power by the Round Table network. 

1- U.S. Cong., Senate, Bolshevik Propaganda, Subcommittee of the Committee on the 
Judiciary, 65th Cong., 1919, p. 802. 
2. Sutton, Revolution, pp. 97-98. 



ITEM: After the October Revolution, all the banks in Russia 
were taken over and "nationalized" by the Bolsheviks— except one: 
the Petrograd branch of Rockefeller's National City Bank. 

ITEM: Heavy industry in Russia was also nationalized — except 
the Westinghouse plant, which had been established by Charles 
Crane, one of the dignitaries aboard the S.S. Kristianiafjord who had 
traveled to Russia with Trotsky to witness the re-revolution. 

ITEM: In 1922, the Soviets formed their first international bank. 
It was not owned and run by the state as would be dictated by 
Communist theory, but was put together by a syndicate of private 
bankers. These included, not only former Tsarist bankers, but 
representatives of German, Swedish, and American banks. Most of 
the foreign capital came from England, including the British 
government itself. 1 The man appointed as Director of the Foreign 
Division of the new bank was Max May, Vice President of 
Morgan's Guaranty Trust Company in New York. 

ITEM: In the years immediately following the October Revolu- 
tion, there was a steady stream of large and lucrative (read 
non-competitive) contracts issued by the Soviets to British and 
American businesses which were directly or indirectly run by the 
Round Table network. The largest of these, for example, was a 
contract for fifty million pounds of food products to Morris & 
Company, Chicago meat packers. Helen Swift was married to 
Edward Morris who was the brother of Harold Swift. Harold Swift 
had been a "Major" at the Red Cross Mission in Russia. 

ITEM: In payment for these contracts and to return the "loans" 
of the financiers, the Bolsheviks all but drained their country of its 
gold— which included the Tsarist government's sizable reserve — 
and shipped it primarily to American and British banks. In 1920 
alone, one shipment came to the U.S. through Stockholm valued at 
39,000,000 Swedish kroner; three shipments came direct involving 
540 boxes of gold valued at 97,200,000 gold roubles; plus at least 
one other direct shipment bringing the total to about $20 million. 
(Remember, these are 2920 values!) The arrival of these shipments 
was coordinated by Jacob Schiff's Kuhn, Loeb & Company and 
deposited by Morgan's Guaranty Trust. 2 

1. U.S. State Dept. Decimal File, 861.516/129, August 28,1922. 

2. U.S. State Dept., Decimal File, 861.51/815, 836, 837, October, 1920. Also Sutton, 
Revolution, pp. 159-60,165. 



ITEM: It was at about this time that the Wilson Administration 
sent 700,000 tons of food to the Soviet Union which, not only saved 
the regime from certain collapse, but gave Lenin the power to 
consolidate his control over all of Russia. 1 The U.S. Food Admini- 
stration, which handled this giant operation, was handsomely 
profitable for those commercial enterprises that participated. It was 
headed by Herbert Hoover and directed by Lewis Lichtenstein 
Strauss, married to Alice Hanauer, daughter of one of the partners 
of Kuhn, Loeb & Company. 

ITEM: U.S., British, and German wolves soon found a bonanza 
of profit in selling to the new Soviet regime. Standard Oil and 
General Electric supplied $37 million worth of machinery from 
1921 to 1925, and that was just the beginning. Junkers Aircraft in 
Germany literally created Soviet air power. At least three million 
slave laborers perished in the icy mines of Siberia digging ore for 
Britain's Lena Goldfields, Ltd. W. Averell Harriman— a railroad 
magnate and banker from the United States who later was to 
become Ambassador to Russia — acquired a twenty-year monopoly 
over all Soviet manganese production. Armand Hammer— close 
personal friend of Lenin— made one of the world's greatest for- 
tunes by mining Russian asbestos. 


In those early years, the Bolsheviks were desperate for foreign 
goods, services, and capital investment. They knew that they 
would be gouged by their "capitalist" associates, but what of it? It 
wasn't their money. All they cared about was staying in power. 
And that was not as easy as it may have seemed. Even after the coup 
d'etat in which they seized control of the mechanism of govern- 
ment, they still did not control the country at large. In fact, in 1919, 
Lenin had almost given up hope of expanding beyond Petrograd 
and a part of Moscow. Except for Odessa, all of Southern Russia 
and the Crimea were in the hands of General Deniken who was 
strongly anti-Communist. Speaking before the Tenth Congress of 
the Russian Communist Party, Lenin laid it out plainly: 

1- See George F. Kennan, Russia and the West under Lenin and Stalin (Boston: Little, 
Brown and Company, 1961), p. 180. 


Without the assistance of capital it will be impossible for us to 
retain proletarian power in an incredibly ruined country in which the 
peasantry, also ruined, constitutes the overwhelming majority — and, 
of course, for this assistance capital will squeeze hundreds per cent out 
of us. This is what we have to understand. Hence, either this type of 
economic relations or nothing... 

On another occasion Lenin further explained his rationale for 
accepting Wall Street's terms. He said: 

The Capitalists of the world and their governments, in pursuit of 
conquest of the Soviet market, will close their eyes to the indicated 
higher reality and thus will turn into deaf mute blindmen. They will 
extend credits, which will strengthen for us the Communist Party in 
their countries; and giving us the materials and technology we lack, 
they will restore our military industry, indispensable for our future 
victorious attack on our suppliers. In other words, they will labor for 
the preparation of their own suicide. 2 

Arthur Bullard, mentioned previously as the representative in 
Russia of the U.S. Committee on Public Information, apparently 
understood the Bolshevik strategy well. Even as early as March of 
1918, he sent a cablegram to Washington warning that, while it is 
true we ought to be ready to help any honest government in need, 
nevertheless, he said, "men or money sent to the present rulers of 
Russia will be used against Russians at least as much as against 
Germans.... I strongly advise against giving material help to the 
present Russian government. Sinister elements in Soviets seem to 
be gaining control." 3 

Unfortunately, Mr. Bullard was a minor player in this game, 
and his opinion was filtered by others along the way. This 
cablegram was sent to his superior, none other than Col. Edward 
Mandell House, in hopes that it would be relayed to the President, 
The message did not get through. 


Returning to the trail of actual events since that time, let us 
pause briefly to take a short side trip through World War II. 

1. V.I. Lenin, Report to the Tenth Congress of the Russian Communist Party, 
March 15,1921. Quoted by Sutton, Revolution, p. 157. 

2. Quoted by Joseph Finder, Red Carpet (New York: Holt, Rinehart and Winston, 
1983), p. 8. 

3. Arthur Bullard papers, Princeton University, cited by Sutton, Revolution, p. 46. 



Financing and profiting from both sides in a conflict has never been 
more blatant. 

ITEM: From the beginning of Hitler's rise to power, German 
industry was heavily financed by American and British bankers. 
Most of the largest U.S. Corporations were knowingly invested in 
war industries. I.G. Farben was the largest of the industrial cartels 
and was a primary source of political funding for Hitler. It was 
Farben that staffed and directed Hitler's intelligence section and 
ran the Nazi slave labor camps as a supplemental source of 
manpower for Germany's factories. Farben even hired the New 
York public relations firm of Ivy Lee, who was John D. Rockefel- 
ler's PR specialist, to help improve Hitler's public image in 
America. Lee, incidentally, had also been used to help sell the 
Soviet regime to the American public in the late 1920s. 1 

ITEM: Much of the capital for the expansion of I.G. Farben 
came from Wall Street, primarily Rockefeller's National City Bank; 
Dillon, Read & Company, also a Rockefeller firm; Morgan's Equita- 
ble Trust Company; Harris Forbes & Company; and, yes, the 
predominantly Jewish firm of Kuhn, Loeb & Company. 2 

ITEM: During the Allied bombing raids over Germany, the 
factories and administrative buildings of I.G. Farben were spared 
upon instructions from the U.S. War Department. The War Depart- 
ment was liberally staffed with men, who in civilian life, had been 
associates of the investment firms previously mentioned. For 
example, the Secretary of War at that time was Robert P. Patterson. 
James Forrestal was Secretary of the Navy and later became 
Secretary of Defense. Both men had come from Dillon Read and, in 
fact, Forrestal had been president of that firm. 

ITEM: During World War II, under the Lend-Lease program, 
the United States sent to the Soviets more than $11 billion in aid, 
including 14,000 aircraft, nearly half a million tanks and other 
military vehicles, more than 400 combat ships, and even half of the 
entire U.S. supply of uranium which then was critically needed for 
the development of the atomic bomb. But fully one-third of all the 
Lend-Lease shipments during this period comprised industrial 
equipment and supplies to be used for the development of the 

1 Anthony Sutton, Wall Street and the Rise of Hitler (Seal Beach, California: 76 
Press, 1976),. 15-18,33-43, 67-97,99-113. Also Revolution, p. 174. 
2. Sutton, Hitler, pp. 23-61. 



Russian economy after the war. And when the war did end, the 
Lend-Lease program continued to flow into the Soviet Union for 
over a year. As late as the end of 1946, Russia was still receiving 
twenty-year credit terms at 2 3 /s per cent interest, a far lower rate 
than returning GIs could obtain. 1 


With the termination of the Lend-Lease program, it was neces- 
sary to invent new mechanisms for the support of Soviet Russia 
and her satellites. One of these was the sale of much-needed 
commodities at prices below the world market and, in fact, below 
the prices that Americans themselves had to pay for the same 
items. This meant, of course — as it did in the case of Lend 
Lease — that the American taxpayer had to make up the difference. 
The Soviets were not even required to have the money to buy these 
goods. American financial institutions, the federal government, and 
international agencies which are largely funded by the federal 
government, such as the International Monetary Fund and the 
World Bank — lent the money to them. Furthermore, the interest 
rates on these loans also are below the market requiring still 
additional subsidy by American citizens. And that is not all. Almost 
all of these loans have been guaranteed by the United States 
government, which means that if — no, make that when — these 
countries default in their payments, the gullible American public is 
once again called upon to make them good. In other words, the 
new mechanism, innocently and deceptively referred to as "trade," 
is little more than a thinly disguised means by which members of 
the Round Table who direct our national policies have bled billions 
of dollars from American citizens for an ongoing economic transfu- 
sion into the Soviet bloc — and continue to do so now that the word 
Soviet has been changed to the less offensive Democratic Socialism. 
This enables those regimes to enter into contracts with American 
businessmen to provide essential services. And the circle is com- 
plete: From the American taxpayer to the American government to the 
"socialist" regime to the American businessman and, ultimately, to the 
American financier who funded the project and provided the political 
influence to make it allpossible. 

1. Anthony C. Sutton, National Suicide: Military Aid to the Soviet Union (New 
Rochelle. New York: Arlington House, 1973), p. 24. 



This is the key to understanding the transfusion mechanism. 
Many Americans have looked at this process and have jumped to 
the conclusion that there must be a nest of Communist agents 
within our government. In an exam on reality politics, they would 
receive half credit for that answer. Yes, there undoubtedly have 
been, and continue to be, Red agents and sympathizers burrowed 
deep into our government woodwork, and they are all too happy to 
help the process along. But the main motive force has always come 
from the non-Communist, non-Democratic Socialist, non- 
American, non-anything members of the Round Table network 
who, as Lenin said, in the pursuit of profit are laboring for the 
preparation of their own suicide. 

These men are incapable of genuine patriotism. They think of 
themselves, not as citizens of any particular country, but as citizens 
of the world. They can do business just as easily with bloodthirsty 
dictatorships as with any other government— especially since they 
are assured by the transfer mechanism that the American taxpayer 
is going to make good on the deal. 

When David Rockefeller was asked about the propriety of 
providing funding for Marxist and Communist countries which are 
openly hostile to the United States, he responded: "I don't think an 
international bank such as ours ought to try to set itself as a judge 
about what kind of government a country wishes to have." 

Wishes to have? He was talking about Angola where the 
Marxist dictatorship was forced upon the people with Cuban 
soldiers and Soviet weapons! 

Thomas Theobald, Vice President of Citicorp, was asked in 1981 
about his bank's loans to Poland. Was he embarrassed by making 
loans to a Communist country, especially following the regime's 
brutal repression of free-trade unions? Not at all. "Who knows 
which political system works?" he replied. "The only test we care 
about is, can they pay their bills." What he meant, of course, was 
can the American taxpayer pay Poland's bills. 

ITEM: The following item, taken directly from the Los Angeles 
Times just a few months after Theobald's statement, tells the story: 

WASHINGTON — For months, the Reagan Administration has 
been using federal funds to repay Polish loans owed to U.S. banks, and 
the bill for this fiscal year may amount to $400 million, Deputy 

Secretary of Agriculture Richard E. Lyng said Monday "They (the 

Polish authorities) have not been making payments for at least the last 


half of the last year," Lyng said. "When they don't make a payment, 
the U.S. Department of Agriculture makes a payment."... 

Lyng said the U.S. Government paid $60 million to $70 million a 
month on guaranteed Polish loans in October, November, December, 
and January — and "we will continue to pay them." 1 

This, remember, was precisely at the time the Polish govern- 
ment had declared martial law and was using military force to 
crush workers' demonstrations for political reform. The Polish 
default on this $1.6 billion loan was by no means an isolated event. 
Communist Rumania and a multitude of Latin American countries 
were soon to follow. 

The hard fact is that American taxpayers unknowingly have 
been making monthly bank payments on behalf of Communist, 
socialist, and so-called Third- World countries for many years. And, 
with the more recent staging of apparent reform within the former 
Soviet bloc, Congress has tripped all over itself to greatly accelerate 
that trend. 

Americans, of course, want to believe that the Evil Empire is 
crumbling, and the Soviets-turned-Democrats play directly to that 
desire. Since the end of World War II, their primary objectives have 
been (1) to disarm us and (2) to get our money. The facade of 
Perestroika and Glasnost has been merely a ploy to accomplish both 
objectives at once. All they have had to do is get rid of a few of the 
old hard-liners, replace them with less well-known personalities 
who are essentially the same (all of the new leaders come from the 
ranks of the old leadership), change their labels from "Commu- 
nists" to "Social Democrats," and then sit back while we happily 
tear down our military defenses and rush billions of dollars to their 
failing economies. There undoubtedly will be some progress 
allowed in the area of free speech, but the military and security 
organizations continue in full readiness. The iron fist beneath the 
velvet glove remains ready to strike when the time comes that the 
facade is no longer necessary. 

Even if the entire ploy were genuine, there is no reason to 
believe that these Social Democracies will ever become better 
investment risks. The primary thing that has held them back 
economically in the past is their socialist system, and that most 

1. "U.S. Repaying Loans Owed by Poland to American Banks," by William J. 
Eaton, Los Angeles Times, February 2,1982. 



definitely will not be changed. All of the new "anti-Communist 
Social Democrats" have pledged their loyalty to the principles of 
Marx and have said in plain language that they will use our money 
to develop, not abandon socialism. These countries will continue to 
be unproductive and will continue to be unable to pay their loans. 
The American taxpayers will continue to be forced by the Cabal to 
pay the bill. 

ITEM: Before the Bolshevik coup d'etat, Russia was one of the 
most productive agricultural nations in the world. The great wheat 
fields in Ukraine justly earned her the title of the Bread Basket of 
Europe. But when the people's Utopia arrived, agriculture came to 
a standstill, and famine stalked the land. Even after Stalin, when the 
regime is said to have adopted more humane and productive 
policies, Russia never produced enough food for itself. A nation that 
cannot feed its citizens cannot develop its industry and it certainly 
cannot build a potent military force. It is not surprising, therefore, 
that for decades, the United States has annually "sold" tens of 
millions of tons of wheat— and other food stuffs — to Russia. The 
quote marks are to emphasize the underlying transfusion mecha- 
nism previously described. 

ITEM: The American government-industrial complex provided 
the Soviets with the money, technology, and the actual construction 
of two of the world's largest and most modern truck plants. The 
Kama River plant and the Zil plant produce over 150,000 heavy- 
duty trucks per year— including armored personnel carriers and 
missile launchers — plus 250,000 diesel engines, many of which are 
used to power Soviet tanks. Forty-five per cent of the cost of this 
project came from the U.S. Export-Import Bank, an agency of the 
federal government, and an equal amount from David 
Rockefeller's Chase Manhattan Bank. The Soviets put up only ten 
per cent. The loan, of course, was taxpayer-guaranteed by the U.S. 
Export-Import Bank which, at the time, was under the direction of 
William Casey. Casey later was appointed as head of the CIA. to 
protect America from global Communism. 1 (Are you beginning to 
get the picture?) 

ITEM: Almost every important facet of Eastern-Bloc heavy 
industry could well be stamped "Made in the U.S.A." With the 

1- "U.S. Builds Soviet War Machine," Industrial Research & Development, July, 1980, 
pp. 51-54. 


specific approval of each successive president, we have provided 
the latest oil-drilling equipment, chemical processing plants, air- 
traffic radar systems, equipment to produce precision bearings, 
large-craft helicopter engines, laser technology, highly advanced 
computer systems, and nuclear power plants. We have trained 
hundreds of their technicians in American institutions and factories 
and have provided their astronauts with the space suits developed 
by NASA. We have even trained their pilots at U.S. Air Force bases 
and paid for their military officers to attend our War College. All of 
this has been used by the Russian government— as Lenin predicted 
it would— to build their military industry in preparation for an 
attack on their suppliers. The great pretense of crumbling Commu- 
nism, has not altered that strategy. It may even be the implementa- 
tion of it. 

ITEM: When Boris Yeltsin seized control of the former Soviet 
government, one of his first official acts was to decree that foreign 
businesses had the right to take their profits out of the country. 
From a purely business perspective, that was a sound move 
because it would provide incentive for foreign investment. But 
there was more to it than that. Recall from a previous chapter that 
the lion's share of that investment was to be funded by American 
taxpayers in the form of direct aid, bank-loan bailouts, and 
government insurance through the Overseas Private Investment 
Corporation. Jane Ingraham provides the details: 

During 1992 Yeltsin wheeled and dealed with Royal Dutch/Shell, 
British Petroleum, Amoco, Texaco, and Exxon. The Chevron joint 
venture to develop the Tengiz oil field was signed. McDermott 
International, Marathon Oil, and Mitsui signed a contract with the 
Russian government to develop oil and natural gas off Sakhalin Island. 
Chevron and Oman formed a consortium to build a huge pipeline to 
carry crude oil from Kazakhstan to the Black Sea, Mediterranean, and 
Persian Gulf. Occidental Petroleum signed a joint venture with Russia 
to modernize two oil fields in Siberia.... Newmont mining signed a 
joint venture to extract gold in Uzbekistan. Merrill Lynch's chairman, 
William Schreyer (CFR), signed up as financial adviser to "aid in 
privatizing" the Ukrainian State Property Fund. AT&T CEO Robert 
Allen (CFR, TC ) signed a huge contract to supply switching systems 
for all of Kazakhstan.... 

1. Trilateral Commission. 



US West joined with the Hungarian government to own and 
operate a national cellular telephone system; GM Vice President 
Marina Whitman (CFR, TC) joined the governments of Hungary and 
Yugoslavia to make cars; GE CEO John Welch (CFR) and vice 
chairman of the board, Lawrence Bossidy (TC), bought a majority 
stake in Hungary's lighting industry; Ralston-Purina, Dow Chemical, 
Eastman Kodak, SC Johnson & Son, Xerox, American Express, Procter 
& Gamble, Woolworth, Philip Morris, Ford, Compaq 
Computer — hardly a single American brand name was missing. 1 

ITEM: In February of 1996, the Clinton Administration made a 
$1 billion loan of US taxpayers' money to Russia's state-controlled 
Aeroflot company so it could more effectively compete with 
American companies such as Boeing in the building of jumbo jets. 
By the end of that year, the former Soviet Bloc countries had 
received transfusions from the World Bank of over $3 billion. 

ITEM: Now the action has spread to China. American banks 
and businessmen— with taxpayers standing by with guarantees — 
have provided power-generating equipment, modern steel mills, 
and military hardware including artillery shells, anti-submarine 
torpedoes, and high-tech electronic gear to update Russian-made 
jet fighters. All of this is explained as a means of weaning the Red 
Chinese away from mother Russia and encouraging them to move 
closer to free-enterprise capitalism. Yet, in 1985, at the height of the 
frenzy over building trade bridges to China, the regime signed a 
$14 billion trade pact with Russia and, in 1986, sent a $20 million 
interest-free loan to the Communist Sandinistas in Nicaragua. Even 
after the 1989 Tiananmen Square massacre in Beijing, when U.S. 
officials were publicly condemning China for human-rights viola- 
tions, business quietly continued as usual. "The United States 
cannot condone the violent attacks and cannot ignore the conse- 
quence for our relationship with China," said President Bush. Yet, 
within only a few weeks of the bloodshed, and at the very time that 
student leaders were being executed, the Administration approved 
a $200 million, low-interest loan for delivery of four of Boeing's 
newest jumbo-jet aircraft. In 1993, forty-seven more jetliners were 
sold with a projected sale of 800 more over the next fifteen years. 
Amoco is spending $1.5 billion to develop oil fields in the China 
Sea. A joint venture between the Chinese government and Chrysler 

1. "The Payoff," by Jane H. Ingraham, The New American, June 28,1993, pp. 25-6. 


is building military jeeps. A similar joint project is being used to 
upgrade their F-8 fighter planes. Three communications satellites 
were cleared for delivery. AT&T contracted a $30 million cellular 
communications network. Even the President's brother, Prescott 
Bush, resumed his plan to set up a satellite-linked computer 
network and to build a golf course near Shanghai. 

China's interest in military technology is revealing. In addition 
to the advanced hardware purchased from the United States, the 
Chinese have bought MIG-31 and SU-27 jet fighters from Russia 
and an aircraft carrier constructed in Ukraine. In May of 1992, 
China set off its biggest underground nuclear blast. In 1997, the 
purchase list was extended to include self-propelled gun-mortar 
systems and Russia's most advanced diesel-electric submarines. 

Although it is known that China maintains a slave-labor work 
force in excess of a million people — they call them "convicts" — and 
although the Tariff Act of 1930 prohibits the United States from 
importing any goods made even in part by convicts or other forced 
labor, every administration starting with Nixon has renewed the 
"most-favored-nation" trade status for China. 

How is China expected to pay for all this "trade"? Very simple. 
By 1996, China had become the largest single recipient of guaran- 
teed loans and subsidies from the World Bank. 

ITEM: In addition to these decades of global trade, credit, and 
taxpayer guarantees, the United States government has transferred 
tens of billions of dollars in direct foreign-aid grants with no pretense 
at all regarding expectation of repayment. 

The trail leads to Wall Street, and the tracks are fresh. The 
Round Table network did succeed in exploiting the markets of 
Eastern Europe and continues to do so today. The cast of characters 
has changed, but the play remains the same. In the beginning, the 
Council on Foreign Relations was dominated by J.P. Morgan. It is 
still controlled by international financiers. The Morgan group 
gradually has been replaced by the Rockefeller consortium, and the 
roll call of participating businesses now reads like the Fortune 500. 
The operation no longer pretends to be a Red Cross mission; it now 
masquerades under the cover of "East-West Trade." 

Politicians are fond of talking about the necessity of preserving 
world peace, and trade, we are told, is one of the best ways to do it. 
The implication is that this is a time of peace. In truth, we live in 
one of the most war-torn eras the world has ever seen. No continent 



today, except Antarctica, is free from war. There are from 25 to 40 
military struggles going on somewhere every day of the year. 
There have been more than 150 armed conflicts since the end of 
World War II with the death count already in excess of 20 million 
and rising. 1 We cannot help noticing that this also has been a period 
of rising government debt and the global creation of fiat money. 


The alchemists of ancient times vainly sought the philosophers' 
stone which they believed would turn lead into gold. Is it possible 
that such a stone actually has been found? Can it be that the money 
alchemists of our own time have learned how to transmute war 
into debt, and debt into war, and both into gold for themselves? 

In a previous section, we theorized a strategy, dubbed the 
Rothschild Formula, in which the world's money cabal deliberately 
encourages war as a means of stimulating the profitable production 
of armaments and of keeping nations perpetually in debt. This is 
not profit seeking, it is genocide. It is not a trivial matter, therefore, 
to inquire into the possibility that our elected and non-elected 
leaders are, in fact, implementing the Rothschild Formula today. 

ITEM: In his address to the graduating class at Annapolis in 
1983, Secretary of the Navy, John Lehman, said: 'Within weeks, 
many of you will be looking across just hundreds of feet of water at 
some of the most modern technology ever invented in America. 
Unfortunately, it is on Soviet ships." 

As Professor Sutton observed in his book, The Best Enemy Money 
Can Buy, the guns, the ammunition, the weapons, and the transpor- 
tation systems that killed Americans in Korea and Vietnam came 
from the American-subsidized economy of the Soviet Union. The 
trucks that carried these weapons down the Ho Chi Minh Trail 
were manufactured in American-built plants. The ships that carried 
the supplies to Sihanoukville and Haiphong and later to Angola 
and Nicaragua came from NATO allies and used propulsion 
systems that our State Department could have kept out of Soviet 
hands. Sutton concludes: "The technical capability to wage the 

1- These figures are taken from United Nations publication E/CN.5/1985/Rev.L 
1985 Report on the World Social Situation (New York: United Nations, 1985), p. 14. The 
January 1993 revision of that document does not give cumulative figures but shows 
that the number of conflicts has been accelerating. So the current numbers, what- 
ever they may be, are even worse. 


Korean and Vietnamese wars originated on both sides in Western, 
mainly American, technology, and the political illusion of "peace- 
ful trade" promoted by the deaf mute blindmen was the carrier for 
this war-making technology." 1 

ITEM: That leads us to the more recent wars in the Middle East 
and the rise of "Islamic Fundamentalism." Iran, Iraq, Syria, Algeria, 
the PLO, the Muslim Brotherhood, and similar anti-American 
groupings have all received weapons, funding, and clandestine 
support from the U.S. government. In the Gulf War, every effort 
was made to insure that Hussein's regime was contained but not 
destroyed (shades of the Korean and Vietnam wars). Most of his 
bacterial-weapons factories were spared. After the cease fire, he 
was allowed to keep his fleet of helicopter gunships, which he 
promptly used to put down a large-scale internal revolt. 

The big pill to swallow is that Saddam Hussein has been an 
asset to the global planners in the West, and they have done 
everything possible to keep him in power. This strategy has lately 
become so obvious that there is no longer any serious attempt to 
conceal it. The task now is how to explain it to the gullible public so 
as to make it sound like a good idea. 

As mentioned previously, the think-tank and talent pool for the 
implementation of this strategy has been the Council on Foreign 
Relations. In 1996, the Managing Editor of the CFR's monthly 
journal, Foreign Affairs, was Fareed Zakaria, who offered the 
following rationalization: 

Yes, it's tempting to get rid of Saddam. But his bad behavior 
actually serves America's purposes in the region.... If Saddam 
Hussein did not exist, we would have to invent him.... The end of 
Saddam Hussein would be the end of the anti-Saddam coalition. 
Nothing destroys an alliance like the disappearance of the enemy..-. 
Maintaining a long-term American presence in the gulf would be 
difficult in the absence of a regional threat. 2 

That is about as clear a statement of the Rothschild Formula as 
one is apt to find. Yet, many people cannot believe it is real, even 
Congressmen. For example, Representative James Traficant from 
Ohio, speaking before the House on April 29,1997, exclaimed: 

1. Anthony Sutton, The Best Enemy Money Can Buy (Billings, Montana: Liberty 
House Press, 1986), p. 191. 

2. "Thank Goodness for a Villain," Newsweek, Sept. 16,1996, p. 43. 



America gives billions to Russia. With American cash, Russia 
builds missiles. Russia then sells those missiles to China. And China, 
who gets about $45 billion in trade giveaways from Uncle Sam, then 
sells those Russian-made missiles to Iran. 

Now Iran, with those Russian-made missiles sold to them by 
China, threatens the Mideast. So Uncle Sam, who is concerned about 
about Iran threatening the Mideast because of those Russian-made 
missiles sold to them by China that we financed by American cash 
sends more troops and sends more dollars.... Mr. Speaker, this is not 
foreign policy. This is foreign stupidity. 1 

Traficant is on target with his analysis of the problem, but he 
missed the bull's eye regarding the cause. American leaders are not 
stupid. They merely are implementing the Rothschild Formula. To 
justify world government, it is necessary to have wars and the 
threat of wars. Wars require enemies with frightful weapons. 
Saddam Hussein is one of the best enemies money can buy. 

If it is true that Western leaders are deliberately funding their 
own enemies, we must assume they have considered Lenin's 
prediction that, by so doing, they are preparing their own suicide — 
ours, also, by the way. We must also conclude that they are 
confident of avoiding that destiny. Whether they are right or wrong 
is not the issue here. The point is they believe they are correct and, 
further, they are building a world order which they are confident of 
being able to control. How they plan to bring that to pass is the 
subject of a later section, but perpetual war is an important part of 
it. Unless we are able to break the grip of these strategists, the 
Rothschild Formula will continue to play a major role in our future. 


There are few historians who would challenge the fact that the 
funding of World War I, World War II, the Korean War, and the 
Vietnam War was accomplished by the Mandrake Mechanism 
through the Federal Reserve System. An overview of all wars since 
the establishment of the Bank of England in 1694 suggests that most 
of them would have been greatly reduced in severity, or perhaps 
not even fought at all, without fiat money. It is the ability of 
governments to acquire money without direct taxation that makes 
modern warfare possible, and a central bank has become the 
preferred method of accomplishing that. 

1- Congressional Record, April 29,1997. 



One can argue the necessity, or at least the inevitability, of fiat 
money in time of war as a means of raw survival. That is the primal 
instinct of both individuals and governments, all other considera- 
tions aside. We shall leave that for the philosophers. But there can 
be no debate over the fact that fiat money in time of peace has no 
such justification. Furthermore, the ability of governments and 
banking institutions to use fiat money to fund the wars of other 
nations is a powerful temptation for them to become embroiled in 
those wars for personal profit, political advancement, or other 
reasons which fall far short of a moral justification for bloodshed. 

The Federal Reserve System has always served that function. 
The on-going strategy of building up the military capabilities of 
America's potential enemies leaves us no reason to believe we have 
seen the last of war. Therefore, it is not an exaggeration to say that 
the Federal Reserve System encourages war. There can be no better 
reason for the Creature to be put to sleep. 


The Bolshevik Revolution was a coup d'etat in which a radical 
minority captured the Russian government from the moderate 
revolutionary majority. They accomplished this through deception, 
organization, discipline, and surprise. The Red Cross Mission of 
New York financiers threw support to the Bolsheviks and, in 
return, received economic rewards in the form of rights to Russia's 
natural resources plus contracts for construction and supplies. The 
continued participation in the economic development of Russia 
and Eastern Europe since that time indicates that this relationship 
has survived to the present day. These financiers are not pro- 
Communist nor pro-anything else. Their motivation is profit and 
power. They are now working to bring both Russia and the United 
States into a world government which they expect to control. War 
and threats of war are tools to prod the masses toward the 
acceptance of that goal. It is essential, therefore, that the United 
States and the industrialized nations of the world have credible 
enemies. As these words are being written, Russia is wearing the 
mask of peace and cooperation. But we have seen that before. We 
may yet see a return of the Evil Empire when the timing is right. 
U.S. government and megabank funding, first of Russian, and now 
of Chinese and Middle-East military capabilities, cannot be under- 
stood without this insight. 

Section IV 


It has been said that those who are ignorant of 
history are doomed to repeat its mistakes. It may 
come as a surprise to learn that the Federal 
Reserve System is America's fourth central bank, 
not its first. We have been through all this before 
and, each time, the result has been the same. 
Interested in what happened? Then let's set the 
coordinates of our time machine to the colony of 
Massachusetts and the year 1690. To activate, turn 
the page. 

Chapter Fifteen 


The bitter experience of the American colonies 
with fiat money; the resolve of the founding 
fathers to prohibit the new nation from resorting 
to paper money without backing; the drafting of 
the Constitution to that end; the creation of a true 
American dollar; the prosperity that followed. 

In the golden days of radio, on the Edgar Bergen Show, the 
ventriloquist would ask his dummy, Mortimer Snerd, "How can 
you be so stupid?" And the answer was always the same. After a 
moment of deep thought on the part of Mortimer, he would drawl 
his reply, "Well, it ain't easy!" 

When we look at the monetary chaos around us today — the 
evaporating value of the dollar and the collapsing financial institu- 
tions—we are compelled to ask: How did we get into this fix? And, 
unfortunately, Mortimer's response would be quite appropriate. 

To find out how we got to where we are, it will be necessary to 
know where we started, and a good place to begin that inquiry is 
with the Constitution of the United States. Article I, Sections 8 and 
10 say: 

Congress shall have the power — 

To borrow money ... to coin money, regulate the value thereof, 
and of foreign coin, and fix the standard of weights and measures;... 
[and] to provide for the punishment of counterfeiting.... 

No state shall ... coin money; emit bills of credit; [or] make 
anything but gold and silver coin a tender in payment of debts. 

The delegates were precise in their use of these words. 
Congress was given the power to "coin money," not to print it. 
Thomas M. Cooley's Principles of Constitutional Law explains that 
'to coin money is to stamp pieces of metal for use as a medium of 
exchange in commerce according to fixed standards of value." 


What was prohibited was to "emit bills of credit" which, according 
to the speeches and writings of those who drafted the document, 
meant the printing of paper IOUs which were intended to be 
circulated as money— in other words, the printing of fiat money 
not backed by gold or silver. 

At first, it would seem that nothing could be more clear. Yet, 
these two simple clauses have become the basis for literally 
thousands of pages of conflicting interpretation. The crux of the 
problem is that, while the Constitution clearly prohibits the states 
from issuing fiat money, it does not specifically prevent the federal 
government from doing so. That was truly an unfortunate over- 
sight on the part of the document's framers, but they probably 
never dreamed in their wildest nightmares that their descendants 
"could be so stupid" as to not understand their intent. 

Furthermore, "it ain't easy" to miss their intent. All one has to 
do is look at the monetary history that led up to the Constitutional 
Convention and to read the published letters and debates of the 
men who affixed their signatures to that founding document. 

As one reads through the debates on the floor of the conven- 
tion, one is struck by the passion that these delegates held on the 
subject of money. Every one of them could remember from his 
personal experience the utter chaos in the colonies caused by the 
issuance of fiat money. They spoke out against it in no uncertain 
terms, and they were adamant that it should never be tolerated 
again in America— at either the state or federal level. 


The first colonial experience with fiat money was in the period 
from 1690 to 1764. Massachusetts was the first to use it as a means 
of financing its military raids against the French colony in Quebec. 
The other colonies were quick to follow suit and, within a few 
years, were engaging in a virtual orgy of printing "bills of credit." 
There was no central bank involved. The process was simple and 
direct, as was the reasoning behind it. As one colonial legislator 
explained it: 

Do you think, gentlemen, that I will consent to load my 
constituents with taxes when we can send to our printer and get a 
wagon load of money, one quire of which will pay for the whole? 

1. See William M. Gouge, A Short History of Paper Money and Banking in the United 
States (Philadelphia: T.W. Ustick, 1833), Part II, p. 27. 



The consequences of this enlightened statesmanship were clas- 
sic. Prices skyrocketed, legal tender laws were enacted to force the 
colonists to accept the worthless paper, and the common man 
endured great personal losses and hardship. By the late 1750s, 
Connecticut had price inflated by 800%, the Carolinas had inflated 
900%, Massachusetts 1000%, Rhode Island 2300%.! 

The situation was so out of hand that, beginning in 1751, the 
British Parliament stepped in and, in one of those rare instances 
where interference from the mother country actually benefited the 
colonies, it forced them to cease the production of fiat money. 
Henceforth, the Bank of England would be the only source. 

What followed was unforeseen by the promoters of fiat money. 
Amid great gloom about "insufficient money," a miracle boom of 
prosperity occurred. The forced use of fiat money had compelled 
everyone to hoard their real money and use the worthless paper 
instead. Now that the paper was in disgrace, the colonists began to 
use their English and French and Dutch gold coins once again, 
prices rapidly adjusted to reality, and commerce returned to a solid 
footing. It remained so even during the economic strain of the 
Seven-Years War (1756-1763) and during the period immediately 
prior to the Revolution. Here was a perfect example of how an 
economic system in distress can recover if government does not 
interfere with the healing process. 


But all of this came to a halt with the onset of colonial rebellion. 
Not only did open hostilities throw England deeper into the cogs 
and wheels of the central-bank mechanism, it also was the compel- 
ling motive for the colonies to return to their printing presses. The 
following figures speak eloquently for themselves: 

• At the beginning of the war in 1775, the total money supply for 
the federated colonies stood at $12 million. 

• In June of that year, the Continental Congress issued another 
$2 million. Before the notes were printed, another $1 million 
was authorized. 

• By the end of the year, another $3 million. 

1 Paul and Lehrman, p. 23. 

2- Roger W. Weiss, "The Colonial Monetary Standard of Massachusetts," Economic 
History Review 27 (November 1974), p. 589. 


• $19 million in 1776. 

• $13 million in 1777. 

• $64 million in 1778. 

• $125 million in 1779. 

• A total of $227 million in five years on top of a base of 
$12 million is an increase of about 2000%. 

• On top of this "federal" money, the states were doing the same 
in an approximately equal amount. 

• And still more: the Continental Army, unable to get enough 
money from Congress, issued "certificates" for the purchase of 
supplies totalling $200 million. 

• $650 million created in five years on top of a base of $12 million 
is an expansion of the money supply of over 5000%.! 

Although the economy was devastated by this flood of fiat 
money, most victims were totally unaware of the cause. In 1777, the 
sentiment of a large segment of the population was expressed by 
the words of one patriotic old lady who said: "What a shame it is 
that Congress should let the poor soldiers suffer when they have 
power to make just as much money as they choose." 2 

The immediate result of this money infusion was the appear- 
ance of prosperity. After all, everyone had more money and that was 
perceived as a very good thing. But this was quickly followed by 
inflation as the self-destruct mechanism began to roll. In 1775, the 
colonial monetary unit, called the Continental, was valued at 
one-dollar in gold. In 1778, it was exchanged for twenty-five cents. 
By 1779, just four years from its issue, it was worth less than a 
penny and ceased to circulate as money at all. It was in that year 
that George Washington wrote: "A wagon-load of money will 
scarcely purchase a wagon-load of provisions." 3 

The saying "Not worth a Continental" has its origin in this 
gloomy period. 

1. For an overview of expenditures, see Paul and Lehrman, pp. 26-27. 

2. Gouge, p. 28. The naivite of this lady may be humorous, but are Americans any 
more enlightened today? Would she not feel at home among our modern-day 
electorate who clamor for legislation to pump Federal-Reserve fiat money into 
projects to alleviate hardship among the poor and unemployed? 

3. Quoted by Bolles, Vol. I, p. 132. 



The true nature of the inflation effect has never been more 
accurately perceived or more vividly described than it was by 
Thomas Jefferson: 

It will be asked how will the two masses of Continental and of 
State money have cost the people of the United States seventy-two 
millions of dollars, when they are to be redeemed now with about six 
million? I answer that the difference, being sixty-six millions, has been 
lost on the paper bills separately by the successive holders of them. 
Every one, through whose hands a bill passed, lost on that bill what it 
lost in value during the time it was in his hands. This was a real tax on 
him; and in this way the people of the United States actually 
contributed those sixty-six millions of dollars during the war, and by a 
mode of taxation the most oppressive of all because the most unequal 
of all.i 


It was natural that people struggled to find ways to escape the 
destruction of their savings, and the two most obvious methods 
were (1) to regularly adjust prices upward as the value of the 
money went downward or (2) exchange their goods and services 
only for gold coins. In response, the colonial legislatures and the 
Continental Congress did what governments always do to prevent 
it. They resorted to wage and price controls and to legal-tender 
laws with harsh penalties for non-compliance. Under one such law, 
those who refused to accept worthless money were even described 
as traitors. It declared: 

If any person shall hereafter be so lost to all virtue and regard for 
his Country as to refuse to accept its notes, such person shall be 
deemed an enemy of his Country. 

Rhode Island not only leveled a substantial fine for non- 
acceptance of its notes but, upon a second offense, an individual 
lost his citizenship. When this was declared unlawful by a panel of 
judges, the legislature reacted by dismissing the judges from 
office. 3 

1- Thomas Jefferson, Observations on the Article Etats-Unis Prepared for the 
Encyclopedia, June 22,1786, Writings, Vol. IV, p. 165. 

F. Tupper Saussy, The Miracle on Mainstreet (Sewanee, Tennessee: Spencer Judd, 

1977), pp. 47,48. 

3 Jensen, p. 324 


Then, as now, those who suffered the most from fiat money 
were those who held the most trust in government. In 1777 these 
were mostly the Whigs, for it was they who patriotically held paper 
money and, as a result, lost their livelihoods and their life savings. 
The Tories, on the other hand, mistrusting both government and its 
paper money, passed the bills as quickly as possible in trade for 
real assets, especially gold. Consequently, as a group, they weath- 
ered the storm fairly well. But they often were derided by their less 
prudent neighbors as "Torie speculators," "hoarders," and even 

All of this was painfully fresh in the memories of the delegates 
to the Constitutional Convention and, as the opening session 
convened in Philadelphia in 1787, there were angry mobs in the 
streets threatening the legislators. Looting was rampant. Businesses 
were bankrupt. Drunkenness and lawlessness were everywhere to 
be seen. The fruit of fiat money had ripened, and the delegates did 
not enjoy its taste. 

In October of 1785, George Washington wrote: "The wheels of 
government are clogged, and ... we are descending into the vale of 
confusion and darkness." 1 A year later, in a letter to James 
Madison, he said: "No day was ever more clouded than the 
present. We are fast verging to anarchy." 2 

In February of 1787, Washington wrote to Henry Knox: "If any 
person had told me that there would have been such formidable 
rebellion as exists, I would have thought him fit for a madhouse." 3 

Just three months prior to the opening of the convention, 
Washington voiced his reasons for rejecting the notion of fiat 
money. In answer to the complaint that there was not enough gold 
coin (specie) to satisfy the needs of commerce, he replied: 

The necessity arising from a want of specie is represented as 
greater than it really is. I contend that it is by the substance, not the 
shadow of a thing, we are to be benefited. The wisdom of man, in my 
humble opinion, cannot at this time devise a plan by which the credit 
of paper money would be long supported; consequently, depreciation 
keeps pace with the quantity of the emission, and articles for which it 
is exchanged rise in a greater ratio than the sinking value of the 
money. Wherein, then, is the farmer, the planter, the artisan benefited? 

1. Quoted by Atwood, p. 3. 

2. Ibid., p. 

3. Ibid., p. A. 



An evil equally great is the door it immediately opens for speculation, 
by which the least designing and perhaps most valuable part of the 
community are preyed upon by the more knowing and crafty 
speculators. 1 


This was the prevailing view held by the great majority of 

delegates to the Convention. They were adamant in their resolve to 
create a constitution which would prevent any state, and especially 
the federal government itself, from ever again issuing fiat money. 
And they said so in unmistakable terms. 

Oliver Ellsworth from Connecticut, who later was to become 
our third Chief Justice of the Supreme Court, said: 

This is a favorable moment to shut and bar the door against paper 
money. The mischief of the various experiments which have been 
made are now fresh in the public mind and have excited the disgust of 
all the respectable parts of America. 

George Mason from Virginia told the delegates he had a 
"mortal hatred to paper money." Previously he had written to 
George Washington: "They may pass a law to issue paper money, 
but twenty laws will not make the people receive it. Paper money is 
founded upon fraud and knavery." 

James Wilson from Pennsylvania said: "It will have the most 

salutary influence on the credit of the United States to remove the 
possibility of paper money." 

John Langdon from New Hampshire warned that he would 
rather reject the whole plan of federation than to grant the new 
government the right to issue fiat money. 

George Reed from Delaware declared that a provision in the 
Constitution granting the new government the right to issue fiat 
money "would be as alarming as the mark of the beast in 

Thomas Paine, although not a delegate to the Convention, had 
written the previous year that he was strongly opposed to fiat 
money, which he called counterfeiting by the state, and he espe- 
cially abhorred legal tender laws which force people to accept the 

L Washington to Stone, 16 February, 1787. Quoted by Bancroft, pp. 231-32. 

2. For the context of this and the following statements expressing a similar 

sentiment see Bancroft, pp. 30,43-44,82; also Paul and Lehrman, p. 168. 


counterfeit. He said: "The punishment of a member [of a legisla- 
ture] who should move for such a law ought to be death. " 
An interesting thought. 

If any further evidence is needed that the Founding Fathers 
intended to prohibit the federal government from issuing "bills of 
credit," consider this. The first draft of the Constitution was copied 
in large measure from the original Articles of Confederation. When 
it was taken up for consideration by the delegates, therefore, it 
contained the old provision that had caused so much chaos. It 
stated: "The legislature of the United States shall have the power to 
borrow money and emit bills of credit." But, after a lively discus- 
sion on the matter, the offending provision was voted to be removed 
from the Constitution by an overwhelming margin. 1 Voicing the 
sentiment of the majority of the delegates, Alexander Hamilton 
said: "To emit an unfunded paper as the sign of value ought not to 
continue a formal part of the Constitution, nor ever hereafter to be 
employed; being, in its nature, repugnant with abuses and liable to 
be made the engine of imposition and fraud." 2 

The journal of the Convention for August 16 contains this 

It was moved and seconded to strike out the words "and emit bills 
of credit," and the motion ... passed in the affirmative. [The vote 
cleared by a margin of better than four to one.] 3 

The Tenth Amendment states: "The powers not delegated to 
the United States by the Constitution, nor prohibited by it to the 
States, are reserved to the States respectively, or to the people." The 
power to issue bills of credit is definitely not delegated to the 
United States, and it is specifically prohibited to the States. There- 
fore, if any power to issue fiat money legally exists at all, it is 
reserved for the people. In other words, individuals and private 
institutions, such as banks, have the right to issue lOUs and hope 
that the public will use them as money, but government, at any level, 
is clearly prohibited by the Constitution from doing so. 

1. For an excellent summary of the interplay of ideas between the delegates, see 
Edwin Vieira, Jr., Pieces of Eight: The Monetary Powers and Disabilities of the United 
States Constitution (New Jersey: Sound Dollar Committee, 1983), pp. 71-76. 

2. Alexander Hamilton, Works, Part II, p. 271, as cited by Bancroft, p. 26. 

3. Quoted by Bancroft, pp. 39, 40. 




Incidentally, the Constitution has never been amended on this 
point, nor has the provision that only silver and gold can be used as 
lawful money. It would be interesting if each reader of this book 
would send copies to his or her elected representatives in Washing- 
ton, or at least a photocopy of this section. Every member of 
Congress has sworn to uphold the Constitution, and you might 
attach a short note asking them when they intend to begin. 

Do not be disappointed if your reply is less than satisfactory. 
Politicians have a similar problem to that which judges have. It is 
permissible to rock the boat from time to time, but they are not 
supposed to sink it. Suits against the government challenging the 
constitutionality of our monetary system seldom get to court. It is 
safer for the justices to decline to accept these cases or to dismiss 
them as supposedly "frivolous." Otherwise they would face a 
difficult choice. Either they would have to mutilate logic in order to 
uphold the present inconsistencies — thus, opening themselves to 
possible ridicule — or they would have to declare in favor of the 
Constitution and literally cause the collapse of the entire deficit- 
spending, central-bank mechanism. Such an act would take a 
considerable amount of courage. Not only would they suffer the 
wrath of the Establishment that is nourished by that mechanism, 
they also would have to face a bewildered public which, because of 
lack of knowledge about the Constitution or the nature of money, 
could easily be convinced that the judges had lost their minds. 
Likewise, it is safer for politicians to respond to inquiries of this 
kind merely by quoting some self-serving government document 
which makes our fiat monetary system sound quite legal and 
marvelously constitutional. 

Unfortunately, that is reality. Until the public becomes consid- 
erably better informed than it is at present, we cannot expect too 
much from the courts or from Congress. Bringing this matter to the 
attention of your elected representatives, however, is still well 
worth the effort, because the process of education has to start 
somewhere, and Washington is an excellent place to begin. 

Returning to the point of this digression, however, it is impor- 
tant to know that the federal government was given a precisely 
limited monetary function: "to coin money" and to "regulate the 
value thereof." In view of the fact that gold and silver coin was 


specifically defined as the only kind of money to be allowed, there 
can be no doubt of what was meant by the first half of that power. 
To coin money meant to mint precious-metal coins. Period. 

The second half is equally clear. Both in the Constitution and in 
the discussions among the delegates, the power to regulate the 
value of gold and silver coin was closely tied to the power to 
determine weights and measures. They are, in fact, one and the 
same. To regulate the value of coin is exactly the same as to set the 
nationally accepted value of a mile or a pound or a quart. It is to 
create a standard against which a thing may be measured. The 
wording of this section of the Constitution can be traced to the 
original Articles of Confederation which further clarifies the mean- 
ing that was generally understood at that time: 

The United States in congress assembled shall... have the sole and 
exclusive right and power of regulating the alloy and value of coin 
struck by their own authority, or by that of the respective 
states — fixing the Standard of Weights and Measures throughout the 
United States. 

The intent, therefore, was simply for Congress to determine the 
exact weight of a precious metal that would constitute the national 
monetary unit. 


At the time of these deliberations, Spanish silver coins, called 
pieces of eight, had already become the de facto monetary unit. An 
official commission had been established by the Continental Con- 
gress to sample the circulating coins in the country and determine 
their average value by weight and purity. Charts were published, 
and all coins of various origin were listed by comparative value. 
Congress was already "regulating the value of" the nation's money 
by the time the Constitution was drafted. How these coins became 
dollars is an interesting story. Edwin Vieira tells us: 

Monetary historians generally first associate the dollar with one 
Count Schlick, who began striking such silver coins in 1519 in 
Joachim's Thai, Bavaria. Then called " Schlicktenthalers" or 
"Joachimsthalers," the coins became known simply as "thalers," which 
transliterated into "dollars." Interestingly, the American colonies did 
not adopt the dollar from England, but from Spain. Under that 
country's monetary reform of 1497, the silver real became the Spanish 
money-unit, or unit of account. A new coin consisting of eight reales 
also appeared. Variously known as pesos, duros, piezas de ocho ("pieces 



of eight"), or Spanish dollars (because of their similarity in weight and 
fineness to the thaler), the coins quickly achieved predominance in 
financial markets of the New World because of Spain's then-important 
commercial and political position. 1 

In 1785, Thomas Jefferson urged the adoption of the Spanish 
silver dollar as the nation's official monetary unit. In a pamphlet 
submitted to the delegates of the Continental Congress, he said: 

Taking into our view all money transactions, great and small, I 
question if a common measure, of more convenient size than the 
dollar, could be proposed.... The unit or dollar is a known coin, and 
the most familiar of all to the minds of people. It is already adopted 
from south to north; has identified our currency, and therefore happily 
offers itself as an unit already introduced. 2 

On July 6, 1785, Congress unanimously voted to adopt the 
Spanish dollar as the official monetary unit of the United States. 
Jefferson realized, however, that this was not sufficient. Although 
the coin had been one of the most dependable in terms of weight 
and quality, it still varied in content between issues, and a way had 
to be found to rate one coin in value against another. That was, 
after all, the service that Congress was required to render when it 
was given the power to "regulate the value" of money. Jefferson 
came directly to the point when he said: "If we determine that a 
dollar shall be our unit, we must then say with precision what a 
dollar is. This coin as struck at different times, of different weight 
and fineness, is of different values." 3 

The logic voiced by Jefferson could not be ignored. Two years 
later, after carefully examining the actual weight and fineness of 
the Spanish dollars currently in circulation, Congress defined the 
dollar. After ratification of the Constitution, a dollar would contain 
371.25 grains of fine silver, and all items in commerce, including 
other coins, were to be measured in value against that standard. 

As the Spaniards continued to reduce the silver content of their 
coins, the pressure for the minting of an American dollar of 
predictable value began to mount. Secretary of the Treasury, 
Alexander Hamilton, in his 1791 report to Congress, urged the 

1- Vieira, p. 66. 

2. Propositions Respecting the Coinage of Gold, Silver, and Copper (printed pamphlet 
Presented to the Continental Congress on May 13,1785), pp. 9-10. Cited by Vieira, 
P. 68. 

3- Ibid., p. 11. 


establishment of a federal mint and also presented a powerful case 
for maintaining an inviolable standard for the coins to be produced 
by that mint. He said: 

The dollar originally contemplated in the money transactions of 
this country, by successive diminutions of its weight and fineness, has 
sustained a depreciation of five per cent, and yet the new dollar has a 
currency in all payments in place of the old, with scarcely any 
attention to the difference between them. The operation of this in 
depreciating the value of property depending upon past contracts, 
and ... of all other property is apparent. Nor can it require argument to 
prove that a nation ought not to suffer the value of the property of its 
citizens to fluctuate with the fluctuations of a foreign mint, or to 
change with the changes in the regulations of a foreign sovereign 

The quantity of gold and silver in the national coins, 
corresponding with a given sum, cannot be made less than heretofore 
without disturbing the balance of intrinsic value, and making every 
acre of land, as well as every bushel of wheat, of less actual worth than 
in time past.... [This] could not fail to distract the ideas of the 
community, and would be apt to breed discontent as well among those 
who live on the income of their money as among the poorer classes of 
the people to whom the necessities of life would ... become dearer. 1 


Note in the preceding quotation that Hamilton referred to both 
gold and silver coins, not merely silver. That is because it was 
precisely at this time that Congress began to consider a bimetallic 
coinage. In retrospect, this was a mistake for, throughout history, 
bimetallism has never worked well very long. It always has led to 
confusion and, ultimately, the disappearance as money of one of the 
metals. This is because there is always a subtle shifting of the 
relative values between gold and silver— or any other two metals 
for that matter — depending on constantly changing supply and 
demand. We may set a value ratio of one to the other that is quite 
acceptable today but, eventually, that ratio will no longer reflect 
reality. The metal which grows in value over the other will be 
hoarded or possibly even melted down because it will bring a 
higher price as metal than it will as money. 

That is precisely what happened in the early days of our 
Republic. It was determined after careful analysis of the free- 

1. The Debates and Proceedings in the Congress of the United States (J- Gales, compil. 
1834), Appendix, pp. 2059,2071-73. Cited by Vieira, pp. 95,97. 



market that the value of gold at that time was approximately fifteen 
times the value of silver. The Coinage Act of 1792 accordingly set 
the relative value of gold-to-silver at fifteen-to-one. It then author- 
ized the federal government to mint gold coins called Eagles, and it 
specified that their value was ten dollars. In other words, the gold 
coins would be equal in value to ten silver coins. Ten silver coins, 
each of 371.25 grains of fine silver, would contain a total of 3,712.5 
grains. The content of the Eagle, therefore, was one-fifteenth that 
amount, or 247.5 grains of fine gold. 

Contrary to popular misconception, Congress did not create a 
"gold dollar." (It didn't do that until fifty-seven years later in The 
Coinage Act of 1849.) In fact it reaffirmed that "the money of 
account of the United States shall be expressed in dollars or units" 
and again defined those units as coins containing 371.25 grains of 
pure silver. What Congress did do was authorize the minting of a 
gold coin and arbitrarily fix the value of the gold in that coin at 
fifteen times the value of the dollar. And it also stated that all silver 
and gold coins produced in the federal mint were to be legal tender 
in accordance with their value, based on weight and purity, relative 
to the standard of the silver dollar. 

Oh yes, another thing. It set the death penalty for anyone who 
debases the nation's coinage; a law which, if enforced today, would 
wipe out the House of Representatives, the Senate, the managerial 
level of the Treasury Department, and the Presidency as well. 


Perhaps the most important provision of this Act, however, was 
the establishment of what is called/ree coinage. Under free coinage, 
any citizen may take raw silver or gold to the mint and, for a 
nominal fee, have it converted into coins for personal use. The 
government merely performs a technical function of creating the 
coin and stamping it with its insignia to certify the correct weight 
and purity. The state's role in this is exactly the same as inspecting 
the scales in a grocery store or the meter on a gasoline pump. It is 
merely fulfilling the Constitutional requirement to set standards 
and verify the accuracy of weights and measures. 

Free coinage was to become an important part of the American 
success story, and it lasted until the Gold Reserve Act of 1934 
which, not only terminated it, but even made it illegal for citizens to 
possess gold. We shall take a closer look at that dismal period in a 


later section but, for now, it is important to recall the greatness of 
our monetary system as it once was. Elgin Groseclose explains: 

The principle of free coinage has proved its practical worth as a 
deterrent to debasement and depreciation. Where coinage is on 
private account there is no profit to the state in tampering with the 
standard, and there is no opportunity for such practice by the 
individual. The circulation of coins of similar appearance and 
denomination but of uncertain standard, the arbitrary and 
unpredictable modifications in the standard by autocratic 
government, the temptations to profit which were constantly dangled 
before despotic rulers — these were evils which had perplexed and 
harassed society and hindered the natural growth of economy since 
the days when coined money first appeared. By a stroke they were 
swept away. At the same time, the institution of free coinage, by giving 
stability and character to one of the chief instruments of organized 
economy, made possible a more vigorous and healthy commercial life 
and gave prestige and increased substance to the government 
adopting it. 


This was, indeed, an auspicious beginning for the new nation, 
and the result was immediately observable in an upsurge in 
prosperity. The December 16, 1789 edition of the Pennsylvania 
Gazette declared: "Since the federal constitution has removed all 
danger of our having a paper tender, our trade is advanced fifty per 
cent." 2 But that was just the beginning. Historian Douglass North 
says that "the years 1793-1808, were years of unparalleled prosper- 
ity." 3 Louis Hacker describes the period as one "of unexampled 
business expansion, one of the greatest, in fact, the United States 
has had.... The exports of the country mounted from $19 millions 
in 1791 to $93 millions in 1801. " 4 Furthermore, the federal deficit, 
which amounted to twenty-eight per cent of expenditures in 1792, 
dropped to twenty-one per cent in 1795. By 1802, the deficit had 
disappeared altogether and had been replaced by a surplus that 
was almost as large as the government's total spending. 

George Washington watched this economic miracle with great 
satisfaction and, in correspondence to his friend, LaFayette, the 

1. Groseclose, Money and Man, p. 167. 

2. Quoted by Saussy, p. 36. 

3. Douglass C. North, The Economic Growth of the United States (New York: W.W- 
Norton, 1966), p. 53. 

4. Louis M. Hacker, American Capitalism (New York: Anvil, 1957), p. 39. 



French statesman and former General in the Continental Army, 
Washington commented: "Our country, my dear sir,... is fast 
progressing in its political importance and social happiness." In a 
letter to Catherine Macaulay Graham, he said: "The United States 
enjoys a sense of prosperity and tranquility under the new govern- 
ment that could hardly have been hoped for." And in a letter to the 
American poet and diplomat, David Humphreys, Washington 
exclaimed: "Our public credit stands on that high ground which 
three years ago it would have been considered as a species of 
madness to have foretold." 1 

On the specific subject of paper money without backing by gold 
or silver, Washington wrote: 

We may one day become a great commercial and flourishing 
nation. But if in the pursuit of the means we should unfortunately 
stumble again on unfunded paper money or any similar species of 
fraud, we shall assuredly give a fatal stab to our national credit in its 
infancy. 2 

This, then, was the monetary blueprint laid down by the men 
who drafted our Constitution. In retrospect, about the only flaw 
one can find was the attempt to set a fixed ratio between the value 
of gold and silver. Rather than placing a dollar value on a gold coin, 
the mint should have imprinted the gold value in terms of weight 
and fineness. The free market then would have assigned it an 
exchange value in terms of goods and services, and that automat- 
ically would have determined its correct monetary value as a ratio to 
the silver dollars which were bidding for the purchase of the same 
items. It was inevitable, therefore, that soon after the "ten-dollar" 
Eagle was created, the value of gold over silver began to climb 
higher than the prescribed ratio of fifteen-to-one, and the Eagles 
ceased to circulate. In later years, with the discovery of the great 
gold fields in California and Australia, the process reversed itself, 
and silver dollars disappeared from commerce. But, even though 
this bimetallism led to a discrepancy between the actual conversion 
ratio and that which the government had prescribed, nevertheless, 
it took place in the open market and no one was greatly injured by 
the inconvenience. Throughout it all, there was just one standard: 

1- These letters were written in 1790 and 1791, quoted by Atwood, pp. 5-6. 

2. Written in 1789, quoted by Louis Basso, A Treatise on Monetary Reform (St. Louis, 

Missouri: Monetary Realist Society, 1982), p. 5. 


the defined silver content of a dollar. Furthermore, both the silver 
and gold coins were of intrinsic value and totally honest in their 
measure. No nation could do more for the prosperity of its citizens 
than that. 


The Constitution prohibits both the states and the federal 
government from issuing fiat money. This was the deliberate intent 
of the Founding Fathers who had bitter experience with fiat money 
before and especially during the Revolutionary War. In response to 
the need to have a precisely defined national monetary unit, 
Congress adopted the Spanish dollar then currently in use and 
defined the content of that dollar to be 371.25 grains of pure silver. 
With the establishment of a federal mint, American silver dollars 
were issued in accordance with that standard, and gold Eagles also 
were produced which were then equal in value to ten silver dollars. 
Most importantly, free coinage was established wherein Americans 
were able to convert their raw silver and gold into national coins 
officially certified by the government as to their intrinsic value. The 
product of these measures was a period of sound money and great 
economic prosperity, a period that would come to an end only 
when the next generation of Americans forgot to read their history 
and returned to the use of paper money and "bills of credit." 

The monetary plan laid down by the Founding Fathers was the 
product of collective genius. Nowhere in history can one find so 
many men in one legislative body who understood the fraud 
inherent in fiat money and the hidden-taxation nature of inflation. 
There was never such an assembly of scholars and statesmen 
determined to set a safe course for the nation of their own creation. 
Literally, they handed us a treasure map. All we had to do was 
follow it to economic security and national prosperity. But, as we 
shall see in the following sections, that map was discarded when 
the lessons of history died out with those who had lived it. 

Chapter Sixteen 


The story of the Bank of North America, the 
nation's first central bank, which was formed even 
before the Constitution was drafted; the story of 
the First Bank of the United States, the nation's 
second central bank, which was formed in 1791; 
the massive inflation caused by both banks; the 
causes of their demise. 

It is a surprising fact that the United States had its first central 
batik even before the Constitution was drafted. It was chartered by 
the Continental Congress in the Spring of 1781 and opened its 
doors the following year. There were great expectations at that time 
that the province of Canada would soon join the rebel colonies to 
form a union extending across the entire North American conti- 
nent. In anticipation of that, the new financial institution was called 
the Bank of North America. 

The Bank was organized by Robert Morris, a member of 
Congress, who was a leader of a group of politicians and merchants 
who wanted the new nation to imitate the mercantilism of England. 
They wanted high taxes to support a powerful, centralized govern- 
ment, high tariffs to subsidize domestic industry, a large army and 
navy, and the acquisition of colonial outposts to expand into 
foreign lands and markets. He was a wealthy Philadelphia mer- 
chant who had profited greatly from war contracts during the 
Revolution. He had carefully studied the secret science of money 
and, by 1781, was widely considered to be the financial wizard of 

The Bank of North America was modeled closely after the Bank 
of England. Following the practice of fractional reserve, it was 
allowed to issue paper promissory notes in excess of actual 
deposits, but, since some gold and silver had to be held in the vault, 


there were definite limits to how far that process could go. Bank 
notes were not forced on the people as legal tender for all debts, 
public and private, but the government did agree to accept them at 
their face value in payment of all taxes and duties, which made them 
as good as gold for that specific purpose. Furthermore, unlike the 
central banks of today, the Bank of North America was not given 
the power to directly issue the nation's money. 


On the other hand, the Bank was given the right of monopoly in 
its field, which means there were no other bank notes allowed to 
circulate in competition. This, plus the fact that they were accepted 
at face value in payment of all federal and state taxes, plus the 
further fact that the federal government did not at that time have a 
functioning money of its own, made these bank notes attractive for 
use as a circulating medium of exchange. The intended result was 
that the Bank's paper would be accepted as money, which for a 
while, it was. Furthermore, the Bank was made the official deposi- 
tory for all federal funds and it almost immediately loaned 
$1.2 million to the government, much of which was created out of 
nothing for that purpose. So, in spite of the limitations placed upon 
the Bank, and in spite of the fact that it was essentially a private 
institution, it was intended to be and, in fact, did function as a 
central bank. 

The Bank of North America was fraudulent from the very start. 
The charter required that private investors provide $400,000 for the 
initial subscription. When Morris was unable to raise that money, 
he used his political influence to make up the shortfall out of 
government funds. In a maneuver that was nothing less than 
legalized embezzlement, he took the gold that had been loaned to 
the United States from France and had it deposited in the Bank. 
Then, using this as a fractional-reserve base, he simply created the 
money that was needed for the subscription and loaned it to 
himself and his associates. Such is the power of the secret science. 

It is hard to reconcile the fact that the same men who adopted 
the brilliant monetary restraints of the Constitution a few years 
later would have allowed the Bank of North America to exist. It 
must be remembered, however, that the war was still in progress 

1. See Murray N. Rothbard, Conceived in Liberty: The Revolutionary War, 1775-1784 
(New Rochelle, New York: Arlington House, 1979), Vol. IV, p. 392. 



when the charter was issued, and even the wisest of statesmen are 
often obliged to follow expediency in such times. One also must 
conclude that, while the founding fathers were wise on the nature 
of fiat money created by the government's printing press, they had 
n ot yet had extensive experience with the same mechanism hidden 
behind the obscurities of fractional-reserve banking. 

In any event, the Bank was not to have its charter renewed by 
Congress and it did not survive beyond the end of the war. Murray 
Rothbard details its demise: 

Despite the monopoly privileges conferred upon the Bank of 
North America and its nominal redeemability in specie, the market's 
lack of confidence in the inflated notes led to their depreciation outside 
the Bank's home base in Philadelphia. The Bank even tried to bolster 
the value of its notes by hiring people to urge redeemers of its notes 
not to insist on specie — a move scarcely calculated to improve the 
long-run confidence in the Bank. 

After a year of operation, Morris's political power slipped, and he 
moved quickly to shift the Bank of North America from a central bank 
to a purely commercial bank chartered by the state of Pennsylvania. By 
the end of 1783,... the first experiment with a central bank in the United 
States had ended. 1 

A fitting epilogue to this story was written two hundred years 
later when, in 1980, the First Pennsylvania Bank of Philadelphia, 
the "oldest bank in the nation," was bailed out by the FDIC. 


It will be recalled that, after the Bank of North America was 
terminated and after the Constitutional Convention "closed the 
door on paper money," the United States enjoyed a period of 
unparalleled economic growth and prosperity. But, while the door 
may have been closed, the window was still open. Congress was 
denied the power to print money, but it was not denied the power 
to borrow it. 

In the vocabulary of the common man, to borrow is to accept a 
loan of something that already exists. He is confused, therefore, 
when the banker issues money out of nothing and then says he is 
lending it. He appears to be lending but, in reality, he is creating. 

Then, as now, the mysteries of banking vocabulary were not 
revealed to the average man, and it was difficult to understand 

1- Rothbard, Mystery, pp. 194-95. 



how privately-issued bank notes could serve precisely the same 
purpose as printing-press money— with precisely the same disas- 
trous results. That being the case, the monetary and political 
scientists decided to end run the Constitution. Their plan was to 
establish a bank, to give that bank the power to create money, to 
lend most of that money to the government, and then to make sure 
the IOUs are accepted as money by the public. Congress, therefore, 
would not be emitting bills of credit. The bank would do that. 

Thus, the First Bank of the United States was conceived. 

The proposal was submitted to Congress in 1790 by Alexander 
Hamilton who, at that time, was Secretary of the Treasury. 
Hamilton, incidentally, was a former aide to Robert Morris, foun- 
der of the Bank of North America, so in that sense his role in this 
matter is not surprising. What is surprising is the fact that Hamilton 
had been a staunch supporter of a sound currency during the 
Constitutional Convention. This is hard to reconcile, and one must 
suspect that, even the most well intentioned of men can become 
corrupted by the temptations of wealth and power. It is possible 
that Hamilton, Morris, and other Federalist leaders had hoped to 
keep the government out of the money-making business, not 
because it was the constitutional thing to do, but because that 
would leave the field clear for a central-bank mechanism which, 
because it was further from public view and political control, could 
become their own private engine of profit. It would appear that the 
only other explanation is that these men were fickle in their views 
and did not really understand the implications of their acts. In view 
of their brilliance in all other matters, however, it is difficult to 
muster enthusiasm for that interpretation. 


Hamilton's proposal was strongly opposed by Thomas 
Jefferson, then Secretary of State, and this was the beginning of a 
heated political debate that would preoccupy Congress for many 
decades to come. In fact, it was one of the central issues that led to 
the creation of our first political parties. The Federalists gathered 
around the ideas of Hamilton. The anti-Federalists, later called the 
Republicans, were attracted to the ideas of Jefferson. 1 

1. Curiously, the present Democratic Party traces its origin to Jefferson's Republi- 



Jefferson pointed out that the Constitution did not grant to 
Congress the power to create a bank or anything similar. That 
means such power is reserved to the states or to the people. In a 
rebuttal to Hamilton's proposal, he said: "To take a single step 
beyond the boundaries thus specially drawn around the powers of 
Congress, is to take possession of a boundless field of power, no 
longer susceptible of any definition." 1 Furthermore, he said, even if 
the Constitution had granted such power, it would be an extremely 
unwise thing to do, because allowing banks to create money could 
only lead to national ruin. 

Hamilton, on the other hand, argued that debt was a good 
thing, if kept within reason, and that the nation needed more 
money in circulation to keep up with expanding commerce. Only 
the Bank, he said, would be able to provide that. Furthermore, 
while it is true the Constitution did not specifically grant the power 
to create such a bank, it was, nevertheless, an implied power, 
because it was needed to accomplish other functions which were 
granted in the Constitution. 
That was the end run. 

Nothing could be more polarized than the opposing ideas of 
these two men: 

JEFFERSON: "A private central bank issuing the public currency is a 
greater menace to the liberties of the people than a standing army." 
"We must not let our rulers load us with perpetual debt." 

HAMILTON: "No society could succeed which did not unite A the 
interest and credit of rich individuals with those of the state." "A 
national debt, if it is not excessive, will be to us a national blessing." 


After a year of intense debate, Hamilton's views prevailed and, 
in 1791, Congress granted a twenty-year charter to the Bank of the 

1. "Opinion of Thomas Jefferson, Secretary of State," February 15,1791, quoted by 
Krooss, pp. 147-48. 

2. The comparison between private banks and standing armies can be found m 
many of Jefferson's letters and public utterances. For example, see The Writings of 
Thomas Jefferson (New York: G.P. Putnam & Sons, 1899), Vol. X, p. 31. 

3. The Basic Writings ofThomas Jefferson (Willey Book Company, 1944), p. 749. 

4. Quoted by Arthur M. Schlesinger, Jr., The Age of Jackson (New York: Mentor 
Books, 1945), pp. 6-7. A , , , . „ 

5. Written on April 30, 1781, to his mentor, Robert Morris. Quoted by John H. 
Makin, The Global Debt Crisis: America's Growing Involvement (New York: Basic 
Books, 1984), p. 246. 


United States. It was modelled closely after the Bank of England, 
which means it was almost an exact replica of the previous Bank of 
North America. In fact, as evidence of continuity with the past, the 
president of the new bank was Thomas Willing, the same man who 
had been a partner of Robert Morris and president of the old bank. 1 

As before, the new Bank was given a monopoly in the issuance 
of bank notes. Once again, these notes were not forced on the 
people as legal tender for private debts and contracts, but they/ aw 
legal tender at face value for all debts to the government in the form 
of taxes and duties, which made them attractive for use as common 
money. And once again, the Bank was made the official depository 
of all federal funds. 

The charter specified that the Bank was required at all times to 
redeem its notes in gold or silver specie upon demand by the 
depositor. That was an admirable provision but, since the Bank was 
not also required to keep specie in its vaults in the full amount of its 
note obligations, it was a mathematical impossibility to uphold. 

As with the old Bank of North America, the new Bank of the 
United States was to have eighty per cent of its capital provided by 
private investors with the federal government putting up only 
twenty per cent. That was a mere bookkeeping sleight-of-hand, 
however, because it had been prearranged for the Bank to immedi- 
ately loan back to the federal government exactly that same 
amount. Reminiscent of the Morris scheme in capitalizing the Bank 
of North America, this federal "investment" was essentially a 
means whereby federal funds could be used to make up the 
short-fall of the private investors. "Call it by what name you 
please," said Jefferson, this was not a loan or an investment but an 
outright gift. And he was certainly right. The Bank was able to open 
its doors with less than nine per cent of the private capital required 
by its charter. The total capitalization was specified at $10 million, 
which means that $8 million was to come from private stockhold- 
ers. However, as John Kenneth Galbraith wryly observed: "Numer- 
ous thrifty participants confined themselves to a modest down 
payment, and the bank began operations on around $675,000 in 
hard cash." 2 

1. It is interesting to note that, as a member of the Continental Congress, Willing 
had been one of those who voted against the Declaration of Independence. 

2. Galbraith, p. 72 



Who were these private investors? Their names do not appear 
in the published literature, but we can be certain they included the 
Congressmen and Senators — and their associates — who engineered 
the charter. But there is an interesting line in Galbraith's text that 
hints at another dimension to the composition of this group. On 
page 72 of Money: Whence It Came, Where It Went, he states 
matter-of-factly: "Foreigners could own shares but not vote them." 

What a story is hidden behind that innocuous statement. The 
blunt reality is that the Rothschild banking dynasty in Europe was 
the dominant force, both financially and politically, in the forma- 
tion of the Bank of the United States. Biographer, Derek Wilson, 

Over the years since N.M. [Rothschild], the Manchester textile 
manufacturer, had bought cotton from the Southern states, 
Rothschilds had developed heavy American commitments. Nathan ... 
had made loans to various states of the Union, had been, for a time, the 
official European banker for the US government and was a pledged 
supporter of the Bank of the United States. 

Gustavus Myers, in his History of the Great American Fortunes, is 
more pointed. He says: 

Under the surface, the Rothschilds long had a powerful influence 
in dictating American financial laws. The law records show that they 
were the power in the old Bank of the United States. 

The Rothschilds, therefore, were not merely investors nor just 
an important power. They were the power behind the Bank of the 
United States! The significance of the Rothschild power in Ameri- 
can finance and politics was the subject of extensive comment in a 
previous section, so there is no need to cover that ground again. It 
is important here, however, to at least make a mental note of the 
fact that the Creature fromjekyll Island is descended from a species 
that is not native to this land. 


From the beginning, the primary purpose of the Bank was to 
create money for the federal government. Money for the private 

1. Derek Wilson, p. 178. 

2. Gustavus Myers, History of the Great American Fortunes (New York: Random 
House, 1936), p. 556. 


sector was strictly secondary. That was made clear by the fact that 
the maximum rate of interest it was allowed to charge was six per 
cent. That made it impractical to make loans to anyone except the 
federal government and a few large, prime-rate borrowers. And the 
government wasted no time putting its new central-bank mecha- 
nism to work. Having "invested" $2 million at the start, it con- 
verted that into $8.2 million borrowed within the next five years. 
Which means that $6.2 million was created specifically for its use. 

Anyone familiar with the history of money as outlined in the 
previous section could easily write the following paragraph. 

The creation of millions of new fractional-reserve dollars, 
which the government pushed into the economy through spending 
programs, caused an imbalance between the supply of money and 
the supply of goods and services. Prices appeared to go up as the 
relative value of the dollar went down. In that same five-year 
period, wholesale prices rose by 72%, which is another way of 
saying that 42% of everything people had saved in the form of 
money was quietly confiscated by the government through the 
hidden tax called inflation. 

The same inflation effect that previously had plagued the 
colonies now returned to plague the new generation. This time, 
instead of being caused by printing-press money, it was fractional- 
reserve money. The cog that linked the two mechanisms together 
and caused them to function as one was federal debt. It was federal 
debt that allowed the political and monetary scientists to violate the 
intent of the founding fathers, and it was this same federal debt that 
prompted Jefferson to exclaim: 

I wish it were possible to obtain a single amendment to our 
Constitution. I would be willing to depend on that alone for the 
reduction of the administration of our government to the general 
principle of the Constitution; I mean an additional article, taking from 
the federal government their power of borrowing. 1 

Like so many things in the real world, the Bank of the United 
States was a mixture of evil with some good. It certainly was not all 
bad. In colonial times, the state governments printed as much 
paper money as they pleased, and the loss of purchasing power 
was, in many cases, total. The Bank, on the other hand, was 

1. Letter to John Taylor, November 26, 1789. Quoted by Martin A. Larson, The 
Continuing Tax Rebellion (Old Greenwich, Connecticut: Devin-Adair, 1979), p. xii. 



required to maintain some gold and specie as a base for its pyramid 
of money. Even though it was an inverted pyramid with reserves 
being smaller than the quantity of bank notes, it still represented a 
boundary to just how far the money supply could be expanded. 
And that was good. 

Furthermore, it is apparent that the bank's directors were 
imbued with a certain amount of enlightened self interest in that 
they actually wanted to keep the creation of new money within 
some kind of control. They could profit from the central-bank 
mechanism only so long as the economy as a whole was productive 
enough to support it. They did not want to kill the goose that laid 
the golden egg. So, like their counterparts in the Federal Reserve 
System of our modern day, they spoke the language of restraint 
and, in a few instances, even acted with restraint as well. 


For example, it was during this period that "wildcat banks" 
began to flourish. They were given that name not because they 
were untamed— although that would have been another good 
reason to do so— but because they were located in areas so remote 
in the frontier that it was said their only customers were wildcats. 

Wildcat banks were not noted for meticulous accounting or 
business practices. Like all banks at that time, they were required to 
keep a certain portion of their deposits on hand in the form of gold 
or silver coin. To engender public confidence in their faithfulness to 
that obligation, it was common practice to keep the vault door open 
so a keg or two of gold coins could be viewed during business 
hours— not altogether different from the modern practice of finan- 
cial institutions advertising how many billions in assets they hold 
but never mentioning the size of their liabilities. The wildcatters, 
however, were not reluctant to sprinkle a few precious-metal coins 
over the top of nails and let that take care of public relations. In 
some cases, as state examiners went from bank to bank to check the 
reserves, the gold would arrive only a few minutes ahead of them, 
having been rushed from the vault of the bank previously audited. 

The point is that the Bank of the United States was able to place 
considerable restraint upon the practices of all banks, both wildcat 
and urban. It did this simply by refusing to accept the notes of any 
other bank unless it had a reputation for redeeming those notes in 
specie on demand. The public reacted accordingly. If the notes 


were not good enough for the Bank of the United States, they were 
not good enough for them either. This served as an indirect force of 
moderation that affected all banks of that time. And that, too, was 

Some historians have said that the Bank was a positive force in 
yet another way. Galbraith, for example, writes admiringly: 

On occasion, the Bank of the United States came to the assistance 
of good state banks that were being besieged by their note holders or 
other creditors. So, besides enforcing restraint, it served also as the 
lender of last resort. Thus in its short span of life it went far to perceive 
and develop the basic regulatory functions of a central bank. 1 

One who is less enamored with the idea of a central bank 
would be tempted to ask: If those state banks were so "good," why 
did they need assistance in keeping faith with their depositors? The 
whole idea of a "lender of last resort," which is accepted as sacred 
dogma today, is based on the assumption that it is perfectly 
acceptable for the entire banking system to be fraudulent. It is 
assumed that any single bank or cluster of banks could at any time 
become "besieged by their note holders or other creditors." There- 
fore, it is prudent to have a central bank to take what meager 
reserves there are within the system and rush them from bank to 
bank, if not minutes before the examiner arrives, at least before the 
customers do. 

As for the much talked about restraint exercised over other 
banks, it is not unreasonable to think that this same effect would 
have developed even without the presence of a government bank. 
If the free market had been left to operate, it is certain that, before 
long, one or more banks would gain a deserved reputation for 
honesty and full faith with their depositors. They would become 
the most popular banks and, therefore, the most prosperous. In 
order to accomplish this, however, they would have to reject the 
worthless notes of other banks. The public would react as expected, 
and even the most unscrupulous banks would have to toe the line if 
they wanted to survive. Moderation would be forced on the entire 
banking system as a result of open competition within a free 
market. To assume that only a federally-chartered central bank 
could have brought moderation into the monetary system is to 

1. Galbraith, p. 73. 



believe that only politicians, bureaucrats, and agencies of govern- 
ment can act with integrity, a shaky notion at best. 


In any event, there is no denying the fact that the Bank of the 
United States did provide some braking force to the runaway 
tendencies of many of the nation's private banks. So it could have 
been worse. The inflation that it caused by its own activities could 
have been enlarged even further by the activities of the other banks 
as well. But, that it could have been worse does not make it good. 
As it was, the Bank was the means by which the American people 
lost forty-two per cent of the value of all the money they earned or 
possessed during just those five years. We must not forget, either, 
that this confiscation of property was selective. It did not work 
against the wealthy classes which were able to ride the wave of 
inflation aboard the raft of tangible property which they owned. 
And it especially did not work against those elite few, the political 
and monetary scientists, who were making huge profits from the 
enterprise. The Bank had done precisely what Hamilton had 
advocated: "... unite the interest and credit of rich individuals with 

those of the state." 

The development of this plutocracy was well described by 
Governeur Morris, the former delegate from New York who had 
helped to draft the Constitution into its final form. He had been an 
assistant to Robert Morris (not related) and was a champion of the 
concept of a natural aristocracy. So he knew his subject well when 
he warned: 

The rich will strive to establish their dominion and enslave the 
rest. They always did. They always will.... They will have the same 
effect here as elsewhere, if we do not, by such a government, keep 
them within their proper spheres. We should remember that the 
people never act from reason alone. The rich will take advantage of 
their passions, and make these the instruments for oppressing them 
The result of the contest will be a violent aristocracy, or a more violent 
despotism. 1 

The tide of political pressure against the Bank was steadily 
rising during these years. It is tempting for critics of the central- 
bank mechanism to attribute that to the awakening common sense 

1. Written on July 2, 1787, in a letter to James Madison. Quoted in "Prosperity 
Economics," by W. Cleon Skousen, Freeman Digest, February, 1985, p. 9. 



of the American public. Unfortunately, the picture is not that 
pleasing. It is true that the Jeffersonian Republicans were elo- 
quently holding forth against the Creature's progenitor, and their 
influence was substantial. But there was another group that joined 
with them which had almost exactly opposite ideas and goals. The 
Jeffersonians opposed the Bank because they believed it was 
unconstitutional and because they wanted a monetary system 
based only upon gold and silver coin. The other group was made 
up of the wildcatters, the land speculators, and the empire-building 
industrialists. They opposed the Bank because they wanted a 
monetary system with no restraints at all, not even those associated 
with fractional reserve. They wanted every local bank to be free to 
create as much paper money as the public would swallow, because 
they would then use that money for their own projects and profit. 
Indeed, politics does produce strange bedfellows. 

As the time approached for renewal of the Bank's charter, the 
battle lines inched toward each other. They were of equal force. The 
halls of Congress echoed with the cannon roar of angry debate. The 
vote was deadlocked. Another attack and counter attack. Again a 
deadlock. Into the night the forces clashed. 

When the smoke of battle lifted, the bill for charter renewal had 
been defeated by me vote in the House and one vote, cast by 
Vice-President George Clinton to break the tie, in the Senate. And 
so, on January 24, 1811, the Bank of the United States closed its 

The battle may have been decided, but the war was far from 
over. The losers, bitter with defeat, merely regrouped their forces 
and began to prepare for the next encounter. Unfortunately, the 
events that followed were ideally suited for their plans. 

With the moderating effect of the Bank now removed from the 
scene, the nation's banking system passed wholly into the hands of 
the state-chartered corporations, many of which were imbued with 
the wildcat mentality. Their numbers grew rapidly, and so did the 
money supply which they created. Inflation followed in their 
footsteps. Public dissatisfaction began to rise. 

If the free market had been allowed to operate, it is likely that 
competition soon would have weeded out the wildcatters and 
restored balance to the system, but it was never given a chance. The 
War of 1812 saw to that. 



THE WAR OF 1812 

The War of 1812 was one of the most senseless wars in history. 
The primary cause, we are told, was the British impressment into 
their navy of American sailors on the high seas to assist in the war 
against Napoleonic France. But the French had done exactly the 
same thing to assist in the war against England, yet their acts were 
ignored. Furthermore, the British had already rescinded their 
policy regarding American seamen before the war was underway, 
which means that the cause of the war had been removed, and 
peace could have been restored in honor if Congress had so 
wanted. One must conclude that the pro-banking interests in the 
United States actually wanted the conflict because of the profits that 
could be realized from it. As evidence of this is the fact that the 
New England states, which were home to the seamen who had 
been impressed into service, were firmly against the war, while the 
Western and inland Southern states, which were home to the 
myriad of wildcat banks, howled loudly for a clash of arms. 

In any event, the war was unpopular with the average citizen, 
and it was out of the question for Congress to obtain funding for 
armaments through an increase in taxes. So the government needed 
the state banks to create that money outside the tax structure and 
came to their rescue to protect them from the discipline of the free 
market. It was a classic case of the unholy alliance, the cabal, that 
always develops between political and monetary scientists. Profes- 
sor Rothbard gives the details: 

The U.S. government encouraged an enormous expansion in the 
number of banks and in bank notes and deposits to purchase the 
growing war debt. These new and recklessly inflationary banks in the 
Middle Atlantic, Southern, and Western states, printed enormous 
quantities of new notes to purchase government bonds. The federal 
government then used these notes to purchase arms and 
manufactured goods in New England.... 

By August 1814, it became clear that the banks of the nation apart 
from New England could not pay [in specie], that they were insolvent. 
Rather than allow the banks of the nation to fail, the governments, 
state and federal, decided in August 1814 to allow the banks to 
continue in business while refusing to redeem their obligations in 
specie. In other words, the banks were allowed to refuse to pay their 
solemn contractual obligations.... 

This general suspension was not only highly inflationary at the 
time; it set a precedent for all financial crises from then on. Whether 



the U.S. had a central bank or not, the banks were assured that if they 
inflated together and then got in trouble, government would bail them 

The state banks had created enough instant money for the 
federal government to raise the debt from $45 million to $127 
million, a staggering sum for the fledgling nation. Tripling the 
money supply, with no appreciable increase in goods, means the 
value of the dollar shrank to about one-third its former purchasing 
power. By 1814, when the depositors began to awake to the scam 
and demanded their gold instead of paper, the banks closed their 
doors and had to hire extra guards to protect officials and employ- 
ees from the angry crowds. Once again, the monetary and political 
scientists had succeeded in fleecing the American public of 
approximately 66% of all the money they held during that period, 
and that was on top of the 42% fleecing they got a few years earlier 
by the Bank of the United States. 


Leaning against the storm of paper money all this time was 
Thomas Jefferson, by now, past-President of the United States. 
Trying to bring the nation to its senses, he never ceased speaking 
out against the evil of dishonest money and debt: 

Although all the nations of Europe have tried and trodden every 
path of force and folly in a fruitless quest of the same object, yet we still 
expect to find in juggling tricks and banking dreams, that money can 
be made out of nothing, and in sufficient quantity to meet the expense 
of heavy war. ... 

The toleration of banks of paper discount costs the United States 
one-half of their war taxes; or, in other words, doubles the expenses of 
every war. ... 

The crisis, then, of the abuses of banking is arrived. The banks 
have pronounced their own sentence of death. Between two and three 
hundred millions of dollars of their promissory notes are in the hands 
of the people, for solid produce and property sold, and they [the 
banks] formally declare that they will not pay them.... Paper was 
received on a belief that it was cash [gold], and such scenes are now to 
take place as will open the eyes of credulity and of insanity itself to the 

1. Rothbard, Mystery, pp. 198-99. 

2. Writings, Library Edition, Vol. XIV, p. 227. 

3. Writings, Library Edition, Vol. XIII, p. 364. 



dangers of a jDaper medium abandoned to the discretion of avarice and 
of swindlers. ... 

It is a wise rule never to borrow a dollar without laying a tax at the 
same instant for paying the interest annually and the principal within 
a given term. 2 ... We shall consider ourselves unauthorized to saddle 
posterity with our debts, and morally bound to pay them ourselves. 3 

... The earth belongs to the living, not the dead We may consider 

each generation as a distinct nation A with a right to ... bind themselves, 
but not the succeeding generation. ... 

The modern theory of the perpetuation of debt has drenched the 
earth with blood, and crushed its inhabitants under burdens ever 
accumulating. 5 

And still, Congress did not listen. 

America had its first central bank even before the Constitution 
was drafted. It was called the Bank of North America and was 
chartered by the Continental Congress in 1781. Modeled after the 
Bank of England, it was authorized to issue more paper promissory 
notes than it held in deposits. In the beginning, these notes were 
widely circulated and served as a national currency. Although the 
bank was essentially a private institution, it was designed for the 
purpose of creating money to lend to the federal government, 
which it did from the start. 

The Bank of North America was riddled with fraud, and it 
quickly fell into political disfavor. Its inflated bank notes eventually 
were rejected by ordinary citizens and ceased to circulate outside of 
the Bank's home city of Philadelphia. Its charter was allowed to 
expire and, in 1783, it was converted into a purely commercial bank 
chartered by the state of Pennsylvania. 

The advocates of fiat money did not give up. In 1791, the First 
Bank of the United States (America's second central bank) was 
created by Congress. The new bank was a replica of the first, 
including fraud. Private investors in the Bank were among the 
nation's most wealthy and influential citizens, including some 
Congressmen and Senators. But the largest investment and the 

1- Letter to Dr. Thomas Cooper, Sept. 10,1814, Writings, Library Edition, Vol. XIV, 
pp. 187-89. 

2. Writings, Library Edition, Vol. XIII, p. 269. 

3. Ibid, p. 358. 
4- Ibid., p. 270. 
5. Ibid., p. 272. 


most powerful influence in the new Bank came from the 
Rothschilds in Europe. 

The Bank set about immediately to serve its function of creating 
money for the government. This led to a massive inflation of the 
money supply and rising prices. In the first five years, 42% of 
everything people had saved in the form of money was confiscated 
through the hidden tax called inflation. This was the same phe- 
nomenon that had plagued the colonies less than two decades 
earlier, but instead of being caused by printing-press money, it was 
now fueled by fractional-reserve bank notes created by a central 

As the time for renewal of the Bank's charter approached, two 
groups with opposite intentions became strange political allies 
against it: the Jeffersonians who wanted sound money; and the 
frontier banks, called wildcatters, who wanted unlimited license to 
steal. On January 24, 1811, the charter was defeated by one vote in 
the Senate and one in the House. The central bank was gone, but 
the wildcatters were everywhere. 

The War of 1812 was not popular among the American public, 
and funding would have been impossible through taxes alone. The 
government chose to fund the war by encouraging wildcat banks to 
purchase its war-debt bonds and convert them into bank notes 
which the government then used to purchase war material. Within 
two years, the nation's money supply had tripled, and so had 
prices. Once again, the monetary and political scientists had 
succeeded in fleecing the American public of approximately 66% of 
all the money they held during that period. And that was on top of 
the 42% fleecing they got a few years earlier by the Bank of the 
United States. 

Chapter Seventeen 


The story of the Second Bank of the United States, 
the nation's third central bank; the election of 
Andrew Jackson on an anti-bank platform; the 
battle between President Jackson and the head of 
the bank, Nicholas Biddle; the deliberate creation 
of a depression to frighten the public into keeping 
the bank; Jackson's ultimate victory. 

The monetary chaos that existed at the end of the War of 1812, 
outlined in the previous chapter, was caused by an almost univer- 
sal fraud within the banking industry. Depositors in good faith 
placed their gold and silver into banks for safekeeping and for the 
convenience of using paper money in their everyday transactions. 
The banks, in turn, promised them they could exchange the paper 
for their coins whenever they wished. At the same time, however, 
through the mechanism of fractional-reserve banking, paper 
money was created far in excess of the value of the coins held in 
reserve. Since the new money had just as much claim to the coins as 
the old, the bankers knew that, if a sizable percentage of their 
customers were to request a withdrawal of their coins, that solemn 
promise simply could not be kept. This, in fact, is precisely what 
happened over and over again during that period. 

By 1814, Thomas Jefferson had retired to Monticello and had 
bitterly resigned himself to defeat on the issue of money. In a letter 
to John Adams he said: 

I have ever been the enemy of banks; not of those discounting for 
cash [that is, charging interest on loans of real money], but of those 
foisting their own paper into circulation, and thus banishing our cash. 
My zeal against those institutions was so warm and open at the 
establishment of the bank of the U.S. that I was derided as a Maniac by 
the tribe of bank-mongers, who were seeking to filch from the public 
their swindling and barren gains.... Shall we build an altar to the old 
paper money of the revolution, which ruined individuals but saved 
the republic, and burn on that all the bank charters present and future, 



and their notes with them? For these are to ruin both republic and 
individuals. This cannot be done. The Mania is too strong. It has seized 
by its delusions and corruptions all the members of our governments 
general, special, and individual. 1 

Jefferson was right. Congress had neither the wisdom nor the 
courage to let the free market clean up the mess that remained after 
the demise of the first bank of the U.S. If it had, the fraud soon 
would have become understood by the public, the dishonest banks 
would have folded, the losses would have been taken, and the 
suffering would have been ended, perhaps forever. Instead, Con- 
gress moved to protect the banks, to organize the fraud, and to 
perpetuate the losses. All of this was accomplished in 1816 when a 
twenty-year charter was given to the Second Bank of the United 


In every respect the new bank was a carbon copy of the old, 
with one minor exception. Congress unashamedly extracted from 
the private investors what amounted to nothing less than a bribe in 
the form of $1.5 million "in consideration of the exclusive privileges 
and benefits conferred by this Act." 2 The bankers were glad to pay 
the fee, not only because it was a modest price for such a profitable 
enterprise, but also because, as before, they received an immediate 
government deposit of one-fifth the total capitalization which then 
was used as the base for manufacturing much of the remaining 
startup capital. The charter required the Bank to raise a minimum 
of $7 million in specie, but even in its second year of operation, its 
specie never rose above $2.5 million. 3 Once again, the monetary 
and political scientists had carved out their profitable niches, and 
the gullible taxpayer, his head filled with sweet visions of "banking 
reform," was left to pick up the tab. 

Another important continuity between the old and the new 
Bank was the concentration of foreign investment. In fact, the 
largest single block of stock in the new Bank, about one-third in all, 
was held by this group. It is certainly no exaggeration to say that 

1. Lester I. Cappon, ed., The Adams-Jefferson Letters (New York: Simon and 
Schuster, 1971), Vol. II, p. 424. ' 11 v 

2. Act of 1816, Section 20,3 Stat, at 191. 

3. Rothbard, Mystery, p. 203. 

4. Krooss, p. 25. 



A e Second Bank of the United States was rooted as deeply in 
Britain as it was in America. 

The nation's third central bank ran into deep trouble from the 
start. It had promised to continue the tradition of moderating the 
other banks by refusing to accept any of their notes unless they 
were redeemable in specie on demand. But when the other banks 
returned the gesture and required that the new Bank also pay out 
specie on their demand, it frequently lost its resolve. There was also 
the tiny matter of corruption. As the Bank's major historian writes: 
"So many influential people were interested [in the state banks] as 
stockholders that it was not advisable to give offense by demand- 
ing payment in specie, and borrowers were anxious to keep the 
banks in the humor to lend." 1 

In economics, every policy carries a consequence, and the 
consequence of the loose monetary policy of the Second Bank of the 
United States was that America was introduced to her first experi- 
ence with what now is called the "boom-bust" cycle. Galbraith tells 
us: "In 1816, the postwar boom was full on; there was especially 
active speculation in western lands. The new Bank joyously partici- 

The Bank had the advantage over its competitors of a federal 
charter plus the government's agreement to accept its notes in the 
payment of taxes. But the state banks were by no means left out of 
the game. It was still within their power to create money through 
fractional-reserve banking and, thus, to further inflate the amount 
of the nation's circulating currency. Anxious to get in on this action, 
Pennsylvania chartered thirty-seven new banks in 1817. That same 
year, Kentucky followed suit with forty new charters. The total 
number of banks grew by 46 % in just the first two years after the 
central bank was created. Any spot along the road that had "a 
church, a tavern, or a blacksmith shop was deemed a suitable place 
for setting up a bank." 3 In that same time frame, the money supply 
was expanded by an additional $27.4 million; another taxpayer 
fleecing of over forty per cent. 

1- Ralph C.H. Catterall, The Second Bankofthe United States (Chicago: University of 
Chicago Press, 1902), p. 36. 

2. Galbraith, p. 77. 

3. Norman Angell, The Story of Money (New York: Frederick A. Stokes Co., 1929), 
p. 279. 




In the past, the effect of this inflationary process always had 
been the gradual evaporation of purchasing power and the con- 
tinuous transfer of property from those who produced it to those 
who controlled the government and ran the banks. This time, 
however, the process took on a new twist. Gradualism was 
replaced by catastrophism. The monetary scientists, with their 
hands firmly on the controls of the money machine, now began to 
throw the levers, first one way, and then the other. The expansion 
and then deliberate contraction of the money supply literally threw 
the nation into economic convulsions. Why wait for the apples to 
fall when the harvest can be hastened simply by shaking the tree? 

In 1818, the Bank suddenly began to tighten its requirements 
for new loans and to call in as many of the old loans as possible. 
This contraction of the money supply was justified to the public 
then exactly as it is justified today. It was necessary, they said, to 
put the brakes on inflation. The fact that this was the same inflation 
the Bank had helped to create in the first place, seems to have gone 

There is no doubt that many bankers and politicians act in good 
faith in their attempt to bring under control the inflation they 
themselves have caused. Not everyone who benefits from the 
central-bank mechanism fully understands it. Like Frankenstein, 
they create a monster without realizing they cannot control it. Their 
crime is one of stupidity, not malice. But stupidity is not a 
characteristic of the average banker, especially a central banker, and 
we must conclude that many of the monetary scientists are well 
aware of the monster's power for destruction. At best, they just 
don't care as long as they are safe. And at worst, they perceive that 
they are in the apple-harvesting business. They deliberately tease 
and prod the monster in anticipation of his rampage through the 
village orchards. In the final analysis, of course, it is of little 
importance whether the shaking of the trees is out of innocence or 
malice. The end result is the same. My, how the apples do fall. 

The country's first experience with a deliberately created mone- 
tary contraction began in 1818 when the Bank became concerned 
about its own ability to survive. Professor Rothbard says: 

Starting in July 1818, the government and the BUS [Bank of the 
United States] began to see what dire straits they were in; the 



enormous inflation of money and credit, aggravated by the massive 
fraud, had put the BUS in danger of going under and illegally failing 
to maintain specie payments. Over the next year, the BUS began a 
series of enormous contractions, forced curtailment of loans, 
contractions of credit in the south and west.... The contraction of 
money and credit swiftly brought to the United States its first 
widespread economic and financial depression. The first nationwide 
"boom-bust" cycle had arrived in the United States.... 

The result of this contraction was a rash of defaults, bankruptcies 
of business and manufacturers, and a liquidation of unsound 
investments during the boom. 1 


It is widely believed that panics, boom-bust cycles, and depres- 
sions are caused by unbridled competition between banks; thus the 
need for government regulation. The truth is just the opposite. 
These disruptions in the free market are the result of government 
prevention of competition by the granting of monopolistic power to 
a central bank. In the absence of a monopoly, individual banks may 
operate in a fraudulent manner only to a limited extent and for a 
short period of time. Inevitably, they will be exposed by their more 
honest competitors and will be forced out of business. Yes, their 
depositors will be injured by the bankruptcy, but the damage will 
be limited to a relatively few and will occur only now and then. 
Even geographical regions may be hard hit on occasion, but it will 
not be a national tragedy with everyone brought to their knees. The 
overall economy will absorb the losses, and commerce at large will 
continue to prosper. Within an environment of prosperity, even 
those who have been injured by fraudulent banking would have a 
good chance for rapid recovery. But, when a central bank is 
allowed to protect the fraudulent operators and to force all banks to 
function the same, the forces of competition can no longer dampen 
the effect. The expansion becomes universal and gigantic. And, of 
course, so does the contraction. Except for the bankers and the 
politicians, everyone is injured at the same time; depression is 
everywhere; and recovery is long delayed. 

This is exactly what happened in the so-called panic of 1819. In 
the Documentary History of Banking and Currency, Herman Krooss 

1. Rothbard, Mystery, pp. 204-05. Also see Galbraith, p. 77. 



The Bank, as the largest creditor [to the state banks], had two 
alternatives: it could write off its debts which of course would wipe 
out the stockholders' equity and result in bankruptcy, or it could force 
the state banks to meet their obligations which would mean wholesale 
bankruptcy among state banks. There was no doubt about the 

choice The pressure placed upon state banks deflated the economy 

drastically, and as the money supply wilted, the country sank into 
severe depression. 1 

As historian William Gouge observed: "The Bank was saved, 
and the people were ruined." 2 

Competition between the national Bank and the state banks 
during this period had been moved from the open field of the free 
market to the closed arena of politics. Free-market competition had 
been replaced by government favoritism in the form of charters 
which granted the right of monopoly. A federal charter was clearly 
better than one issued by a state, but the states fought back fiercely 
with what weapons they possessed, and one of those was the 
power to tax. Several states began to levy a tax on the paper notes 
issued by any bank doing business within their borders which was 
not also locally chartered. The intent, although pretended to be the 
raising of state revenue, was really to put the federal Bank out of 


When the Bank refused to pay such a tax to the state of 
Maryland, the issue was taken to the Supreme Court in 1819 as the 
celebrated case of McCulloch v. Maryland. The Chief Justice at that 
time was John Marshall, a leading Federalist and advocate of a 
strong, centralized federal government. As was expected, the 
Marshall Court carefully tailored its decision to support the federal 
government's central bank. 

The narrow issue upon which the constitutionality of the Bank 
was decided was not whether Congress had the power to directly 
or indirectly emit bills of credit or otherwise convert debt into 
money. If that had been the issue, the Court would have been hard 
pressed to uphold the Bank, for that not only is expressly prohib- 
ited by the Constitution, it is precisely what the Bank had been 

1. Krooss, pp. 190-91. 

2. William M. Gouge, A Short History of Paper Motley and Banking in the United States 
(New York: Augustus M. Kelly, 1968), p. 110. 



doing all along, and everyone knew it. Instead, the Court focused 
upon the narrow question of whether or not the Bank was a 
"necessary and proper" means for Congress to execute any other 
constitutional powers it might have. From that perspective, it was 
unanimously held that the Bank was, indeed, constitutional. 

Were the Bank's paper notes the same as Bills of Credit? No, 
because they were backed by the credit of the Bank, not the federal 
government. True, the Bank created money, and most of it was 
used by the government. Never mind all that. The Treasury did not 
print it, therefore, it was not government money. 

Was not the Bank the same as an agency of government? No, 
because merely granting it a national monopoly and enforcing that 
monopoly with the power of the state does not necessarily make it 
"state action." 

Furthermore, the states cannot tax the federal government or 
any of its instruments, including the Bank of the United States, 
because, as Marshall stated: "The power to tax is the power to 

Here was another end run around the Constitution, executed 
this time by the very men who were assumed to be its most loyal 

The Supreme Court had spoken, but the Court of Public 
Opinion had not yet disposed of the case. During the 1820s, 
popular sentiment shifted back to the laissez-faire and sound- 
money principles espoused by the Jeffersonian Republicans. But 
since the Republican Party had by then abandoned those princi- 
ples, a new coalition was formed, headed by Martin Van Buren and 
Andrew Jackson, to resurrect them. It was called the Democratic 
Party, and one of its agenda items was to abolish the Bank of the 
United States. After Jackson was elected to the Presidency in 1828, 
he wasted no time in attempting to build Congressional support for 
that goal. 


By this time, the Bank had come under the direction of Nicholas 
Biddle who was a formidable adversary to Jackson, not only 
because of the power of his position, but because of his strong will 
and sense of personal destiny. He was the archetype of the new 
Eastern Establishment: wealthy, arrogant, ruthless, and brilliant. 
He had graduated from the University of Pennsylvania at the age 


of only thirteen, and, as a young man entering business, had fully 
mastered the secret science of money. 

With the ability to control the flow of the nation's credit, Biddle 
soon became one of the most powerful men in America. This was 
brought out dramatically when he was asked by a Senate Commit- 
tee if his bank ever took advantage of its superior position over the 
state banks. He replied: "Never. There are very few banks which 
might not have been destroyed by an exertion of the powers of the 
Bank. None has ever been injured." 1 As Jackson publicly noted a 
few months later, this was an admission that most of the state 
banks existed only at the pleasure of the Bank of the United States, 
and that, of course, meant at the pleasure of Mr. Biddle. 

The year was 1832. The Bank's charter was good for another 
four years. But Biddle decided not to wait that long for Jackson to 
build his forces. He knew that the President was up for reelection, 
and he reasoned that, as a candidate, he would hesitate to be too 
controversial. To criticize the Bank is one thing, but to come down 
squarely for its elimination altogether would surely cost him many 
votes. So, Biddle requested Congress to grant an early renewal of 
the charter as a means of softening Jackson's campaign against it. 
The bill was backed by the Republicans led by Senator John Clay 
and was passed into law on July 3, just before the election 
campaigns began in earnest. 


It was brilliant strategy on Biddle's part but it didn't work. 
Jackson decided to place his entire political career on the line for 
this one issue and, with perhaps the most passionate message ever 
delivered to Congress by any President, before or since, he vetoed 
the measure. The President's biographer, Robert Remini, says: "The 
veto message hit the nation like a tornado. For it not only cited 
constitutional arguments against recharter— supposedly the only 
reason for resorting to a veto— but political, social, economic, and 
nationalistic reasons as well." 2 

Jackson devoted most of his veto message to three general 
topics: (1) the injustice that is inherent in granting a government- 

1. J.D. Richardson, A Compilation of the Messages and Papers of the Presidents, 1789- 
1908 (Washington: Bureau of National Literature and Art, 1908), Vol. II, p. 581. 

2. Robert V. Remini, The Life of Andrew Jackson (New York: Harper & Row, 1988), 
pp. 227-28. 



sponsored monopoly to the Bank; (2) the unconstitutionality of the 
Bank even if it were not unjust; and (3) the danger to the country in 
having the Bank heavily dominated by foreign investors. 

Regarding the injustice of a government-sponsored monopoly, 
he pointed out that the stock of the Bank was owned only by the 
richest citizens of the country and that, since the sale of stock was 
limited to a chosen few with political influence, the common man, 
not only is unfairly excluded from an opportunity to participate, 
but he is forced to pay for his banking services far more than they 
are worth. Unearned profits are bad enough when they are taken 
from one class of citizens and given to another, but it is even worse 
when the people receiving those benefits are not even citizens at all 
but are, in fact foreigners. Jackson said: 

It is not our own citizens only who are to receive the bounty of our 
Government. More than eight millions of the stock of this bank are 
held by foreigners. By this act the American Republic proposes 
virtually to make them a present of some millions of dollars.... It 
appears that more than a fourth part of the stock is held by foreigners 
and the residue is held by a few hundred of our own citizens, chiefly 
of the richest class. For their benefit does this act exclude the whole 
American people from competition in the purchase of this monopoly 
and dispose of it for many millions less than it is worth 1 

Regarding the issue of constitutionality, he said that he was not 
bound by the previous decision of the Supreme Court, because the 
President and Congress had just as much right to decide for 
themselves whether or not a particular law is constitutional. This 
view, incidentally, was not novel at that time. It is only in relatively 
recent decades that people have begun to think of the Supreme 
Court as being specifically authorized to pass on this question. In 
fact, as Jackson correctly pointed out in his veto message, the 
founding fathers created a government with power divided be- 
tween the executive, legislative, and judicial branches, and that the 
purpose of this division was, not merely to divvy up the chores, but 
to balance one branch against the other. The goal was not to make 
government efficient but to deliberately make it inefficient. Each 
President and each legislator is morally bound, even by oath, to 
uphold the Constitution. If each of them does not have the power to 

1. Krooss, pp. 22-23. 


decide in conscience what is constitutional, then taking an oath to 
uphold it has little meaning. 


Regarding the danger to our national security, Jackson returned 
to the fact that a major portion of the Bank's stockholders were 
foreigners. Even though foreign investors technically were not 
allowed to vote their shares, their financial power was so great that 
the American investors were clearly beholden to them and would 
likely follow their instructions. Jackson concluded: 

Is there no danger to our liberty and independence in a bank that 
in its nature has so little to bind it to our country?... ps there not] cause 
to tremble for the purity of our elections in peace and for the 
independence of our country in war?... Of the course which would be 
pursued by a bank almost wholly owned by the subjects of a foreign 
power, and managed by those whose interests, if not affections, would 
run in the same direction there can be no doubt.... Controlling our 
currency, receiving our public monies, and holding thousands of our 
citizens in dependence, it would be more formidable and dangerous 
than a naval and military power of the enemy. 1 

Jackson saved the greatest passion of his argument for the end. 
Speaking now, not to Congress, but to the voters at large, he said: 

It is to be regretted that the rich and powerful too often bend the 
acts of government to their selfish purposes. Distinctions in society 
will always exist under every just government. Equality of talents, of 
education, or of wealth cannot be produced by human institutions. In 
the full enjoyment of the gifts of Heaven and the fruits of superior 
industry, economy, and virtue, every man is equally entitled to 
protection by law; but when the laws undertake to add to these natural 
and just advantages artificial distinctions, to grant titles, gratuities, 
and exclusive privileges, to make the rich richer and the potent more 
powerful, the humble members of society— the farmers, mechanics, 
and laborers— who have neither the time nor the means of securing 
like favors to themselves, have a right to complain of the injustice of 
their Government. There are no necessary evils in government. Its 
evils exist only in its abuses. If it would confine itself to equal 
protection, and, as Heaven does its rains, shower its favor alike on the 
high and the low, the rich and the poor, it would be an unqualified 
blessing. In the act before me there seems to be a wide and 
unnecessary departure from these just principles. 2 

1. Krooss, pp. 26-27. 

2. Ibid., pp. 36-37. 



The veto did not defeat the Bank. It was merely a declaration of 
war. The major battles were yet to come. 


As Commanding General of the pro-bank forces, Biddle had 
one powerful advantage over his adversary. For all practical 
purposes, Congress was in his pocket. Or, more accurately, the 
product of his generosity was in the pockets of Congressmen. 
Following the Rothschild Formula, Biddle had been careful to 
reward compliant politicians with success in the business world. 
Few of them were willing to bite the hand that fed them. Even the 
great Senator, Daniel Webster, found himself kneeling at Biddle' s 
throne. Galbraith says: 

Biddle was not without resources. In keeping with his belief that 
banking was the ultimate source of power, he had regularly advanced 
funds to members of Congress when delay on appropriations bills had 
held up their pay. Daniel Webster was, at various times, a director of 
the Bank and on retainer as its counsel. "I believe my retainer has not 
been renewed or refreshed as usual. If it be wished that my relation to 
the Bank should be continued, it may be well to send me the usual 
retainers." Numerous other men of distinction had been 
accommodated, including members of the press. 1 

Webster is a particularly interesting study in how even so- 
called "great" men can be compromised by an addiction to wealth. 
He had always been an advocate of sound money in Congress, yet, 
as a lawyer on Biddle's payroll, he represented the Bank's position 
before the Supreme Court in McCidloch v. Maryland. Much of the 
twisted logic that allowed the Court to end-run the Constitution 
and destroy sound money came from his pen. 

After Jackson's veto of the Bank's charter, Biddle requested 
Webster to deliver speeches specifically for the purpose of having 
the Bank reprint them for mass distribution. In one of those 
speeches, Webster echoed the old refrain that the Bank served as a 
moderating influence on the nation's other banks and then piously 
proclaimed: "Congress can alone coin money;... no State (nor even 
Congress itself) can make anything a tender but gold and silver, in 
the payment of debts." 2 In an act of astounding hypocrisy, this 
speech was distributed widely by the very institution that was 

1- Galbraith, p. 80. 
2. Krooss, p. 2. 


designed specifically for creating fractional fiat money, without 
gold or silver backing, to function as tender in the payment of 
debts. Then, as now, most people did not discern between words 
and actions and believed that this speech, delivered by such a 
"great" man, was evidence of the Bank's worthiness. Biddle even 
distributed 300,000 copies of Jackson's veto message, apparently in 
the belief that many would not read it. Obviously A if the Bank 
thought it was so bad as to distribute it, it must be bad. 

The power of the Bank's money was everywhere. It was as John 
Randolph, the fiery Old Republican from Virginia, had said: "Every 
man you meet in this House or out of it, with some rare exceptions, 
which only serve to prove the rule, is either a stockholder, 
president, cashier, clerk or doorkeeper, runner, engraver, paper- 
maker, or mechanic in some other way to a bank." 


Congress, the banks, speculators, industrialists, and segments 
of the press; these were the forces commanded by Biddle. But 
Jackson had a secret weapon which had never been used before in 
American politics. That weapon was a direct appeal to the elector- 
ate. He took his message on the campaign trail and delivered it in 
words well chosen to make a lasting impression on the voter. He 
spoke out against a moneyed aristocracy which had invaded the 
halls of Congress, impaired the morals of the people, threatened 
their liberty, and subverted the electoral process. The Bank, he said, 
was a hydra-headed monster eating the flesh of the common man. 
He swore to do battle with the monster and slay it or be slain by it. 
He bellowed his position to every crowd he could reach: Bank and 
no Jackson, or no bank and Jackson! 3 

On the subject of paper money, the President was equally 
emphatic. His biographer describes the campaign: 

On his homeward journey he reportedly paid all his expenses in 
gold. "No more paper money, you see, fellow citizens," he remarked 
with each gold payment, "if I can only put down this Nicholas Biddle 
and his monster bank." Gold, hardly the popular medium of 
exchange, was held up to the people as the safe and sound currency 

1. Remini, Life, p. 234. 

2. Annals of Congress, 14 Cong., 1st sess., pp. 1066,1110 ff. 

3. Robert Remini, Andrew ]ackson and the Course of American Freedom, 1822-1832 
(New York: Harper & Row, 1981), p. 373. 



which Jackson and his administration hoped to restore to regular use. 
Unlike paper money, gold represented real value and true worth. It 
was the coin of honest men. Rag money, on the other hand, was the 
instrument of banks and swindlers to corrupt and cheat an innocent 
and virtuous public. 1 

Jackson had awakened the indignation of the American people. 
When the November ballots were cast, he received a mammoth 
vote of confidence. He received fifty-five per cent of the popular 
vote (with thirty-seven per cent for Clay, eight per cent for Wirt) 
and eighty per cent of the vote in the electoral college. But the war 
still was not over. Jackson won the election, but the Bank had four 
more years to operate, and it intended to use those years to sway 
public sentiment back to its support. The biggest battles were yet to 


Jackson did not wait to act. He knew that time would be used as 
a weapon against him. "The hydra of corruption is only scotched, 
not dead, " he said. 2 Soon after the election, he ordered Secretary of 
the Treasury, William Duane, to place all new deposits of the 
federal government into various state banks around the country 
and to pay current expenses out of the funds still held by the Bank 
of the United States until that account was drained to zero. Without 
the use of federal money, surely the monster would perish. To 
Jackson's chagrin, however, Duane balked at the order out of a 
sincere conviction that, to do so, would be disruptive to the 

This was not the first time a Cabinet officer and a President had 
come to disagreement. In the past, however, the impasse had 
always been resolved by the resignation of the Secretary. This time 
was different. Duane refused to resign, and that raised an interest- 
ing constitutional question. A President could appoint a member of 
the executive branch only with the consent of the Senate. The 
Constitution was silent, however, on the matter of dismissal. Did 
that, too, require Senate approval? The implication was that it did, 
but the issue had never been tested. 

Jackson had no patience for such theoretical questions. The 
letter arrived promptly on Duane's desk: "Your further services as 

1. Remini, Life, pp. 234-35. 

2. Remini, Course, p. 52. 



Secretary of the Treasury are no longer required." 1 On October 1, 
1833, federal deposits began to move out of the Bank. 

Jackson felt that he finally had the monster firmly within his 
grasp. "I have it chained," he said. 2 With gleeful confidence, he 
added: "I am ready with the screws to draw every tooth and then 
the stumps." If I am not mistaken, he went on, we will have "Mr. 
Biddle and his Bank as quiet and harmless as a lamb in six weeks." 3 


The President's view of the Bank's meek captivity was prema- 
ture, to say the least. Biddle responded, not like a lamb, but more 
like a wounded lion. His plan was to rapidly contract the nation's 
money supply and create another panic-depression similar to the 
one the Bank had created thirteen years earlier. This then could be 
blamed on Jackson's withdrawal of federal deposits, and the 
resulting backlash surely would cause Congress to override the 
President's veto. Remini tells us: 

Biddle counterattacked. He initiated a general curtailment of loans 
throughout the entire banking system.... It marked the beginning of a 
bone-crushing struggle between a powerful financier and a 
determined and equally powerful politician. Biddle understood what 
he was about. He knew that if he brought enough pressure and agony 
to the money market, only then could he force the President to restore 
the deposits. He almost gloated. "This worthy President thinks that 
because he has scalped Indians and imprisoned Judges, he is to have 
his way with the Bank He is mistaken." 4 ... 

"The ties of party allegiance can only be broken," he declared, "by 
the actual conviction of existing distress in the community." And such 
distress, of course, would eventually put everything to rights. 
"Nothing but widespread suffering will produce any effect on 
Congress.... Our only safety is in pursuing a steady course of firm 
restriction— and I have no doubt that such a course will ultimately 
lead to restoration of the currency and the recharter of the Bank. 5 ... My 

1. William J. Duane, Narrative and Correspondence Concerning the Removal of the 
Deposits and Occurrences Connected Therewith (Philadelphia: n.p., 1838), pp. 101-03. 
Quoted by Remini, Life, p. 264. 

2. Quoted by Herman J. Viola, Andrew Jackson (New York: Chelsea House, 1986), 
p. 88. 

3. A letter from Jackson to Van Buren, November 19, 1833, Van Buren Papers, 
Library of Congress. Quoted by Remini, Life, p. 264. 

4. Remini, Life, p. 265. 

5. Remini, Democracy, p. 111. 



own course is decided. All other banks and all the merchants may 
break, but the Bank of the United States shall not break." 1 

Biddle, therefore, decided to use the American people as 
sacrificial pawns in the giant chess match for the Bank's survival. 
The resulting economic chaos is not difficult to imagine. Biddle' s 
contraction of the money supply was executed at a particularly 
vulnerable moment. Business had been expanding as a result of the 
Bank's prior easy credit and now was dependent on it. Also, the 
tariff came due at precisely this time, placing still more demand for 
cash and credit. Losses were sustained everywhere, wages and 
prices sagged, men were put out of work, companies went bank- 
rupt. By the time Congress reconvened in December, in what was 
called the "Panic Session," the nation was in an uproar. Newspa- 
pers editorialized with alarm, and letters of angry protest flooded 
into Washington. 

As the pressure continued to build in Congress, it began to look 
as though Biddle's plan would work. In the public eye, it was 
Jackson who was solely responsible for the nation's woes. It was his 
arrogant removal of Secretary Duane; it was his foolish insistence 
on removing the deposits; it was his obstinate opposition to 


For one-hundred days, a "phalanx of orators" daily excoriated 
the President for his arrogant and harmful conduct. At length, a 
resolution of censure was introduced into the Senate and, on March 
28, 1834, it was passed by a vote of 26 to 20. This was the first time 
that a President had ever been censured by Congress, and it was a 
savage blow to Jackson's pride. Biddle, at last, had the upper hand. 

The President rumbled around the White House in a fit of rage. 
"You are a den of vipers," he said to a delegation of the Bank's 
supporters. "I intend to rout you out and by the Eternal God I will 
rout you out." 2 

The censure was by no means indicative of popular sentiment. 
Even in the Senate, which was a hotbed of pro-Bank support, a 
swing of only three votes would have defeated the measure. 

1. Biddle to William Appleton, January 27, 1834, and to J.G. Watmough, 
February 8, 1834. Nicholas Biddle, Correspondence, 1807-1844, Reginald C. 
McGrane, ed. (New York: Houghton Mifflin, 1919), pp. 219,221. 

2. Quoted by Viola, p. 86. 


During all this time, imperceptibly at first, but quickly growing, the 
public had been learning the truth. Jackson, of course, was doing 
everything within his power to hasten the process, but other factors 
also were at work, not the least of which was Biddle himself. So 
large was his ego that he could not keep from boasting in public 
about his plan to deliberately disrupt the economy. People heard 
these boasts and they believed him. The turning point came when 
Governor George Wolf of Pennsylvania, the Bank's home state, 
came out publicly with a strong denunciation of both the Bank and 
Biddle. This was like the starting bell at a horse race. With the 
Bank's home state turned against it, there was no one left to defend 
it and, literally within days, the mood of the country and of 
Congress changed. 

The Democrats wasted no time consolidating these unexpected 
gains. To test their strength on the issue, on April 4, 1834, they 
called for a vote in the House on a series of resolutions which were 
aimed at nullifying the censure in the Senate. In essence, the 
resolutions stated that the House totally approved the President's 
bank policy. The first resolution, passed by a vote of 134 to 82, 
declared that the Bank of the United States "ought not to be 
rechartered." The second, passed by a vote of 118 to 103, agreed 
that the deposits "ought not to be restored." And the third, passed 
by an overwhelming vote of 175 to 42, called for the establishment 
of a special committee of Congress to investigate whether the Bank 
had deliberately instigated the current economic crisis. It was an 
overwhelming victory for Jackson which would be culminated a 
few years later with the passage of a resolution in the Senate which 
formally rescinded the previous vote of censure. 


When the investigating committee arrived at the Bank's doors 
in Philadelphia armed with a subpoena to examine the books, 
Biddle flatly refused. Nor would he allow inspection of correspon- 
dence with Congressmen relating to their personal loans and 
advances. And he steadfastly refused to testify before the commit- 
tee back in Washington. For lesser mortals, such action would have 
resulted in citations of contempt of Congress and would have 
carried stiff fines or imprisonment. But not for Nicholas Biddle. 
Remini explains: 



The committeemen demanded a citation for contempt, but many 
southern Democrats opposed this extreme action, and refused to 
cooperate. As Biddle bemusedly observed, it would be ironic if he 
went to prison "by the votes of members of Congress because I would 
not give up to their enemies their confidential letters." Although 
Biddle escaped a contempt citation, his outrageous defiance of the 
House only condemned him still further in the eyes of the American 
public. 1 

The Bank was still alive but had been mortally wounded. By 
this time, Jackson had completely paid off the national debt 
incurred by the War of 1812 and had even run up a surplus. In fact, 
he ordered the Treasury to give back to the states more than 
$35 million, which was used for the construction of a wide variety 
of public works. 

With these accomplishments close on the heels of his victory 
over the Bank, the President had earned the undying hatred of 
monetary scientists, both in America and abroad. It is not surpris- 
ing, therefore, that on January 30, 1835, an assassination attempt 
was made against him. Miraculously, both pistols of the assailant 
misfired, and Jackson was spared by a quirk of fate. It was the first 
such attempt to be made against the life of a President of the United 
States. The would-be assassin was Richard Lawrence who either 
was truly insane or who pretended to be insane to escape harsh 
punishment. At any rate, Lawrence was found not guilty due to 
insanity. Later, he boasted to friends that he had been in touch 
with powerful people in Europe who had promised to protect him 
from punishment should he be caught. 3 

The ending to this saga holds no surprises. The Bank's charter 
expired in 1836 and it was restructured as a state bank by the 
Commonwealth of Pennsylvania. After a spree of speculation in 
cotton, lavish advances to the Bank's officers, and the suspension of 
payment in specie, Biddle was arrested and charged with fraud. 
Although not convicted, he was still undergoing civil litigation 
when he died. Within five years, the establishment was forced to 
close its doors forever, and America's third experience with central 
banking came to a close. 

1. Remini, Life, p. 274. 

2. Remini, Democracy, p. 228-29. 

3. Robert J. Donovan, The Assassins (New York: Harper & Brothers, 1952), p. 83. 



It is tempting to let the story stop right there and allow Jackson 
to forever wear the crown of hero and dragon slayer. But a more 
balanced view of these events leads to the conclusion that the forces 
of virtue were not without contamination. Jackson represented the 
position of those who wanted only gold and silver for the nation's 
money. But this group was not large enough to match the power of 
the Bank. He was joined in that battle by many groups which hated 
the Bank for other, less admirable reasons. State banks and business 
interests along the expanding frontier, for example, were not the 
least interested in Constitutional money. They wanted just the 
opposite. They viewed the modest restraints of the federal Bank as 
excessive. With the federal Bank out of the way, they anticipated no 
restraints at all. As we shall see in the following section, it is ironic 
that this is the group that got what it wanted, not the hard-money 

One cannot blame Jackson for accepting the support of these 
groups in his effort to slay the dragon. In politics, it often is 
necessary to make temporary alliances with one's opponents to 
achieve occasional common objectives. But Jackson went further 
than that. More than any other President before him, and rivalled 
by only a few since, he changed the character of American politics. 
He led the nation away from the new concept of diffused powers, 
carefully worked out by the founding fathers, back toward the 
Old-World tradition of concentration and monarchy. By strongly 
challenging the right of the States to secede from the Union, he set 
into motion a concept that, not only would lead to civil war, but 
which would put an end forever to the ability of the states to check 
the expanding power of the federal government. No longer was the 
Union to be based on the principle of consent of the governed. It 
was now to be based on force of arms. And through the manipula- 
tion of voter passion on the Bank issue, he changed the perception 
of the role of President hompublic servant to national leader. 

At the height of the battle against the Bank, when Jackson was 
making a direct appeal to the voters for support, he declared: "The 
President is the direct representative of the people." To fully 
comprehend the significance of that statement, it must be remem- 
bered that the plan of the Constitution was for the President to be 
elected indirectly by the state legislatures, not by the voters at large. 



After fighting a war to throw off the rule of King George, III, the 
founding fathers wanted nothing more to do with kings of any 
kind, and they went out of their way to make sure that the 
president of the United States would never be looked upon as such. 
They realized that an elected ruler, unless his power is carefully 
limited and diffused, can become just as despotic as an unelected 
one. Article 2, Section 1, of the Constitution, therefore, established 
an electoral college to select the President. 

Members of the college are to be appointed by the states. 
Congressmen, Senators, or other officers of the federal government 
are specifically and wisely excluded. The college is supposed to 
select a President strictly on the basis of his integrity and executive 
ability, not his party label, political connections, good looks, 
charisma, or stirring orations. The people may elect their Congress- 
men, but the electoral college chooses the President. Thus, it was 
intended that the President would have a different constituency 
from Congress, and this difference was important to insure the 
balance of power that the framers of the Constitution worked so 
hard to create. As a means of keeping government under control, it 
was a truly brilliant piece of political engineering. 

All of that was changed in the election of 1832. One of the sad 
facts of history is that good causes often are the occasion for 
establishing bad precedents. Jackson's fight against the Bank of the 
United States was one of those events. 


The government had encouraged widespread banking fraud 
during the War of 1812 as an expedient for paying its bills, and this 
had left the nation in monetary chaos. At the end of the war, 
instead of allowing the fraudulent banks to fall and letting the free 
market heal the damage, Congress decided to protect the banks, to 
organize the fraud, and to perpetuate the losses. It did this by 
creating the nation's third central bank called the Second Bank of 
the United States. 

The new bank was almost an exact carbon copy of the previous 
one. It was authorized to create money for the federal government 
and to regulate state banks. It influenced larger amounts of capital 
and was better organized across state lines than the old bank. 
Consequently its policies had a greater impact on the creation and 
extinguishing of the nation's money supply. For the first time in 


our history, the effects began to ricochet across the entire country at 
once instead of being confined to geographical regions. The age of 
the boom-bust cycle had at last arrived in America. 

In 1820, public opinion began to swing back in favor of the 
sound-money principles espoused by the Jeffersonian Republicans. 
But since the Republican Party had by then abandoned those 
principles, a new coalition was formed, headed by Martin Van 
Buren and Andrew Jackson, called the Democrat Party. One of its 
primary platforms was the abolishment of the Bank. After Jackson 
was elected in 1828, he began in full earnest to bring that about. 

The head of the Bank was a formidable adversary by the name 
of Nicholas Biddle. Biddle, not only possessed great personal 
abilities, but many members of Congress were indebted to him for 
business favors. Consequently, the Bank had many political 

As Jackson's first term of office neared its end, Biddle asked 
Congress for an early renewal of the Bank's charter, hoping that 
Jackson would not risk controversy in a reelection year. The bill 
was easily passed, but Jackson accepted the challenge and vetoed 
the measure. Thus, a battle over the Bank's future became the 
primary presidential campaign issue. 

Jackson was reelected by a large margin, and one of his first acts 
was to remove federal deposits from the Bank and place them into 
private, regional banks. Biddle counterattacked by contracting 
credit and calling in loans. This was calculated to shrink the money 
supply and trigger a national panic-depression, which it did. He 
publicly blamed the downturn on Jackson's removal of deposits. 

The plan almost worked. Biddle's political allies succeeded in 
having Jackson officially censured in the Senate. However, when 
the truth about Biddle's strategy finally leaked out, it backfired 
against him. He was called before a special Congressional investi- 
gative committee to explain his actions, the censure against Jackson 
was rescinded, and the nation's third central bank passed into 

Chapter Eighteen 


Attempts to stabilize the banking system by 
political measures, including regulation offrac- 
tional-reserve ratios and establishing bank-failure 
insurance funds; thefailure of all such schemes; 
the resulting economic conditions that led up to 
the Civil War. 

As detailed in the previous chapter, by 1836 the hydra-headed 
monster had been slain and, true to the President's campaign 
promise, the nation had Jackson and no Bank. 

In April of that year, the Administration moved to consolidate 
its victory and pushed a series of monetary reforms through 
Congress. One of these required all banks to cease issuing paper 
notes under five dollars. The figure later was increased to twenty 
dollars, and its purpose was to compel the nation to return to the 
use of gold and silver coin for everyday use, leaving bank notes 
primarily for large commercial transactions. The White House also 
announced that, in the future, all federal land sales would require 
full payment in "lawful money," which, of course, meant precious- 
metal coins. 1 

It must be remembered, however, that even though the Bank of 
the United States was dead, banking was very much alive, and so 
were Jackson's enemies. Much to the disappointment of the hard- 
money advocates, these measures were not sufficient to usher in 
the millennium. Not only were they inadequate by themselves, 
they were soon circumvented by the development of new banking 
techniques and eventually were dismantled completely by a fickle 

1- Otto Scott, The Secret Six: The Fool as Martyr, Vol. Ill of The Sacred Fool Quartet 
(Columbia, South Carolina: Foundation for American Education, 1979), p. 115. 



The prohibition against bank notes of small denomination 
deserves special notice. It was an excellent concept, but what the 
legislators failed to understand, or at least pretended not to under- 
stand, was that banks at this time were increasingly dealing with 
checkbook money, technically called demand deposits. As people 
gradually became accustomed to this new method of transferring 
funds, the importance of bank notes declined. Placing a limit on the 
issuance of bank notes without any restriction on the creation of 
demand deposits was an exercise in futility. 

In 1837, as the Bank of the United States slipped into history, 
the nation was at the tail end of an economic boom. Professor 
Rothbard tells us that this expansion and the accompanying 
inflation had been "fueled by the central bank." 1 Total money in 
circulation had risen by eighty-four per cent in just four years. 
Then, as inevitable as the setting sun, that portion of the money 
supply which had been created by fractional-reserve banking— in 
other words, the part which was backed by nothing— -began to 
contract. Sixteen per cent of all the nation's money totally disap- 
peared in just that first year. Again, men were put out of work, 
businesses went into bankruptcy, homes and savings were lost. 
Many banks folded also, but their operators walked away with the 
spoils. Only the depositors were left holding the empty bag. 

There were numerous proposals advanced regarding how to 
infuse stability into the banking system. But, then as now, none of 
them dealt with the real problem, which was fractional-reserve 
banking itself. As Groseclose observed, these proposals were "each 
according to a particular theory of how to multiply loaves and 
fishes, or how to make candy wool." 2 Since the proposals presented 
then are identical to the ones being offered today, and since each of 
them was actually tried, it would seem appropriate to inquire into 
the actual results of these experiments. 


There were four schools of thought regarding the multiplica- 
tion of loaves and fishes. The first of these was that the creation of 
money should be limited to a ratio of the bank's assets. This was the 
formula that was tried in the New England states. In Massachu- 
setts, for example, the issuance of bank notes was limited to two 

1. Rothbard, Mystery, p. 211. 

2. Groseclose, Money and Man, p. 184. 


times the amount of the bank's capital actually held in the vault. 
Furthermore, this could not be in the form of paper money, bonds, 
securities, or other debt instruments; it had to be strictly gold or 
silver coin. Also, the banks were limited in the number of small- 
denomination bank notes they could issue and, in this, Massachu- 
setts served as the model for Jackson's attempted reform at the 
federal level. By previous standards, and certainly by the standards 
that prevail today, this was an exceptionally conservative policy. In 
fact, even during the previous stress of the War of 1812, when 
banks were failing by the hundreds across the country, the Massa- 
chusetts banks, and most of the other New England banks as well, 
were able to maintain full payment in specie. 

With the passage of time, however, the limit on bank notes 
became less important, because the banks now were using checkbook 
money instead. Their paper notes may have been limited to 
two-hundred per cent of their capital, but there was no effective 
limit to the numbers they could ink into people's deposit books. So 
the "fraction" in fractional-reserve banking began to shrink again. 
Consequently, the monetary contraction of 1837 "was like a scythe 
over the crop," says Groseclose, and thirty-two Massachusetts 
banks collapsed between that year and 1844. 1 

The state attempted to patch the system by instituting a 
network of bank examiners and by increasing the liability of bank 
stockholders for the lost funds of their depositors, but the underly- 
ing problem was still ignored. A new crop of banks then sprang 
into existence and a new wave of speculative mania swept through 
the economy. By 1862, even though the law still limited bank notes 
to two times capital, the banks had created $73,685,000 in total 
money, including checkbook money. This was supported by a base 
of only $9,595,000 of specie, a reserve of only thirteen per cent. 
Massachusetts had not solved the problem. 


The second theory about how to have stable banking and allow 
the banks to create money out of nothing was to create a "safety 
fund." This fund, supported by all the banks, would come to the 
aid of any member which needed an emergency loan to cover a 

L Groseclose, Money and Man, pp. 188-89. 



sudden drain of its reserves. It was the forerunner of today's 
Federal Deposit Insurance Corporation and related agencies. 

The first safety fund was established in New York in 1829. The 
law required each bank to contribute annually one-half of one per 
cent of its capital stock until the total reached three per cent. The 
fund was first put to the test during the crisis of 1837, and was 
almost swamped. The only thing that saved it was that the state 
agreed to accept the worthless notes of all the defunct banks as 
payment for canal tolls. In other words, the taxpayers were 
compelled to make up the difference. When the fund was 
exhausted, the solvent banks were punished by being forced to pay 
for the deficits of the insolvent ones. Naturally, this impelled all 
banks to act more recklessly. Why not? The up side was that profits 
would be higher— for a time, at least— and the down side was that, 
if recklessness got them into trouble, the safety fund would bail 
them out. The result was that the system provided a penalty for 
prudence and an incentive for recklessness; a situation with perfect 
parallel to that which exists in the banking system today. 
Groseclose says: 

The conservatively managed institutions, lending upon the safer 
risks, upon which naturally the margins of profit were smaller, found 
the assessments burdensome, and were compelled to embark upon the 
more speculative business in order to carry the charges. 

Gradually, all banks sank into the quagmire and, in 1857, the 
Massachusetts safety-fund was abandoned. 

Michigan's experience with a safety fund was perhaps more 
typical of the period. It was established in 1836 and was completely 
blown away the next year, during the panic of 1837. 


The third proposal for maintaining a stable monetary system 
while, at the same time, allowing the banks to operate fraudulently 
was to base the money supply on government securities; in other 
words, upon paper certificates of government debt. This was the 
scheme adopted in the 1850s by Illinois, Indiana, Wisconsin and 
other Midwestern states. It also set the precedent for the Federal 
Reserve System sixty years later. Groseclose continues: 

1. Groseclose, Money and Man, p. 186. 



So rampant was the note-issue mania that the notes came to be 
called by the appropriate name of "red dog" and "wild cat" 
currency.... The rising crop of banks created a fictitious demand and a 
rising market for securities (to be used as capital stock) and a 
consequent stimulus to the creation of public debt by the issue of 
securities. This was followed by more bank notes being issued against 
the securities, demand increasing and the market rising, more 
securities issues, more bank notes, and so on in an endless chain of 
debt creation and the inflation of paper wealth. The process was finally 
brought to a stop by the panic of 1857. 1 


The fourth proposal for producing something out of nothing 
was to back the issuance of money by the full faith and credit of the 
state. This was the method tried by many of the Southern states and 
it, too, has survived to become one of the cornerstones of our 
modern-day banking system. 

Alabama, for example, in 1835 created a state bank funded by a 
public bond issue of $13,800,000. Instant money flooded through 
the economy and people were joyous over the miracle prosperity. 
The legislators were so intoxicated with the scheme that they 
completely abolished direct taxation and decided to run the 
government on bank money instead. In other words, instead of 
raising state revenue through taxes, they found it easier to raise it 
through inflation. 

Like all the others, this bubble also burst in the panic of 1837. A 
postmortem examination of the Bank showed that $6,000,000 of its 
assets were completely worthless. The people who had loaned their 
real money to the venture, backed by the full faith and credit of the 
state, lost almost all of their investment— in addition to what they 
had paid through inflation. 

Mississippi put its full faith and credit behind a state bank in 
1838 and issued $15,000,000 in bonds as backing for its bank notes. 
The bank was belly-up within four years, and the state completely 
repudiated its obligations on the bonds. This infuriated the bond 
holders, particularly the British financiers who had purchased a 
large portion of the issue. The devastating effect upon the state and 
its people is described by Henry Poor: 

L Groseclose, Money and Man, pp. 188-89. 


The $48,000,000 of the bank's loans were never paid; the 
$23,000,000 of notes and deposits were never redeemed. The whole 
system fell, a huge and shapeless wreck, leaving the people of the State 
very much as they came into the world.... Everybody was in debt, 
without any possible means of payment. Lands became worthless, for 

the reason that no one had any money to pay for them Such 

numbers of people fled ... from the State that the common return upon 
legal processes against debtors was in the very abbreviated form 
"G.T.T. " — gone to Texas. 1 

Money, based on the full faith and credit of the state, met 
similar fates in Illinois, Kentucky, Florida, Tennessee, arid Louisi- 
ana. When the state bank collapsed in Illinois in 1825, all of the 
"full-faith" bank notes left in its possession were ceremoniously 
burned at the public square. Another bank was formed in 1835 and 
collapsed in 1842. So devastating were these experiences that the 
Illinois Constitution of 1848 stipulated that, henceforth, the state 
should never again create a bank or own banking stock. 

In Arkansas, even real estate was tried as a magic wand. 
Subscribers to the state bank, instead of putting up cash, were 
allowed merely to pledge their real estate holdings as collateral. 
The bank notes rapidly plummeted in value to only twenty-five per 
cent of their face amount, and within four years, the bank was 


There was a parallel development at this time called "free 
banking." The name is an insult to truth. What was called free 
banking was merely the conversion of banks from corporations to 
private associations. Aside from no longer receiving a charter from 
the state, practically every other aspect of the system remained the 
same, including a multitude of government controls, regulations, 
supports, and other blocks against the free market. George Selgin 
reminds us that "permission to set up a bank was usually accompa- 
nied by numerous restrictions, including especially required loans 
to the state." 2 

1. Henry V. Poor, Money and Its Laws (London: Henry S. King and Co., 1877), 
p. 540. 

2. George A. Selgin, The Theory of Free Banking: Money Supply under Competitive Note 
Issue (Totowa, New Jersey: Rowman & Littlefield, 1988), p. 13. 



The free banks were no less fraudulent than the chartered 
banks. The old custom was revived of rushing gold coins from one 
bank to another just ahead of the bank examiners, and of "putting a 
ballast of lead, broken glass and (appropriately) ten-penny nails in 
the box under a thinner covering of gold coins." 1 When one such 
free bank collapsed in Massachusetts, it was discovered that its 
bank note circulation of $500,000 was backed by exactly $86.48. 2 

Professor Hans Sennholz writes: 

Although economists disagree on many things, most see eye to 
eye on their acceptance of political control... These economists 
invariably point at American money and banking before the Civil War 
which, in their judgment, confirms their belief. In particular, they cite 
the "Free Banking Era" of 1838-1860 as a frightening example of 
turbulent banking and, therefore, applaud the legislation that 
strengthened the role of government. 

In reality, the instability experienced during the Free Banking Era 
was not caused by anything inherent in banking, but resulted from 
extensive political intervention.... "Free banking" acts ... did not 
repeal burdensome statutory provisions and regulatory directives. In 
fact they added a few. 3 

For banking to have been truly free, the states would have had 
to do only two things: (1) enforce banking contracts the same as any 
other contract, and then (2) step out of the picture. By enforcing 
banking contracts, the executives of any bank which failed to 
redeem its currency in specie would have been sent to prison, an 
eventuality which soon would have put a halt to currency overis- 
sue. By stepping out of the picture and dropping the pretense of 
protecting the public with a barrage of rules, regulations, safety 
funds, and guarantees, people would have realized that it was their 
responsibility to be cautious and informed. But, instead, the banks 
continued to enjoy the special privilege of suspending payment 
without punishment, and the politicians clamored to convince the 
voters that they were taking care of everything. 

In short, throughout this entire period of bank failures, eco- 
nomic chaos, and fleecing of both investors and taxpayers, America 

1- Galbraith, p. 87. 

2. Charles Beard, The Rise of American Civilization (New York: Macmillan, 1930), 
Vol. I, pp. 429-30. 

3. "Old Banking Myths," by Hans F. Sennholz, The Freeman (Irvington-on- 
Hudson, New York), May, 1989, pp. 175-76. 



tried everything except full redemption by gold and silver. As the 
name of Andrew Jackson faded into history, so did the dream of 
honest banking. 

Not all banks were corrupt, and certainly not all bankers were 
conspirators against the public. There were many examples of 
honest men striving to act in an ethical manner in the discharge of 
their fiduciary responsibilities. But they were severely hampered 
by the system within which they labored, a system which, as 
previously illustrated, punished prudence and rewarded reckless- 
ness. In balance, the prudent banker was pushed aside by the 
mainstream and became but a footnote to the history of that period. 


Another positive aspect to the picture is that it was during this 
same time that many business enterprises came into being and 
greatly prospered, albeit at the expense of those who had no desire 
to contribute. The great canals were dug, the railroads pushed back 
the frontier, boom towns sprang up along the way, prairies were 
turned into agricultural land, and new businesses followed in their 
wake. Much of this expansion was facilitated by a flood of 
fraudulent money created by the banks. Apologists for fractional- 
reserve banking have been prone to look at this development and 
conclude that, in net balance, it was a good thing. The fact that 
some people were cheated in order for others to prosper did not 
seem to be important. America just wouldn't have grown and 
prospered without funny money. Galbraith, for example, exudes: 

As civilization, or some approximation, came to an Indiana or 
Michigan crossroads in the 1830s or 1840s, so did a bank. Its notes, 
when used and loaned to a farmer to buy land, livestock, feed, seed, 
food or simple equipment, put him into business. If he and others 
prospered and paid off their loans, the bank survived. If he and others 
did not so prosper and pay, the bank failed, and someone— perhaps a 
local creditor, perhaps an eastern supplier— was left holding the 
worthless notes. But some borrowers from this bank were by now in 
business. Somewhere, someone holding the notes had made an 
involuntary contribution to the winning of the West.... The [banking] 
anarchy served the frontier far better than a more orderly system that 
kept a tight hand on credit could have done. 1 

1. Galbraith, p. 85. 



William Greider continues this rationale: 

"Reckless, booming anarchy," in short, produced fundamental 
progress. It was not a stable system, racked as it was with bank failures 
and collapsed business ventures, outrageous speculation and 
defaulted loans. Yet it was also energetic and inventive, creating 
permanent economic growth that endured after the froth had blown 

This, of course, is a classic example of the failure of liberal 
economics. When evaluating a policy, it focuses only on one 
beneficial consequence for one group of people and ignores the 
multitude of harmful effects which befall all other groups. Yes, if we 
look only at the frontiersmen who acquired new ranches and 
established new business, the fractional-reserve system looks 
pretty good. But, if we add in to the equation all the financial losses 
to all of the people who were victimized by the system— what 
Galbraith calls "an involuntary contribution" and what Greider 
lightly dismisses as "froth" — then the product is zero at best and, in 
terms of morality, is deeply in the negative. 

Galbraith, Greider, and other popular economists assume that 
the West could not possibly have been won with honest banking. 
Logic does not support such a conclusion. There is every reason to 
believe that the bank failures and the resulting business failures on 
the frontier all but canceled out the gains that were made by hard 
work and honest industry. Had these destructive convulsions been 
absent, as most of them would have been under a less chaotic 
system, there likely would have been fewer business starts, but a 
greater number would have finished, and it is entirely possible that 
the West would have been won even faster than it was. 

It's too bad the theory has never been tried. 


As chronicled in a previous section, economic conflict has 
always played a major role in fomenting war. There is no time in 
American history in which there was more economic conflict 
between segments of the population than there was prior to the 
Civil War. It is not surprising, therefore, that this period led directly 
into the nation's bloodiest war, made all the more tragic because it 
pitted brother against brother. 

1. Greider, p. 259. 


There are many popular myths about the cause of the War 
Between the States. Just as the Bolshevik Revolution is commonly 
believed to have been a spontaneous mass uprising against a 
tyrannical aristocracy, so, too, it is generally accepted that the Civil 
War was fought over the issue of slavery. That, at best, is a 
half-truth. Slavery was an issue, but the primary force for war was a 
clash between the economic interests of the North and the South. 
Even the issue of slavery itself was based on economics. It may 
have been a moral issue in the North where prosperity was derived 
from the machines of heavy industry, but in the agrarian South, 
where fields had to be tended by vast work forces of human labor, 
the issue was primarily a matter of economics. 

The relative unimportance of slavery as a cause for war was 
made clear by Lincoln himself during his campaign for the 
Presidency in 1860, and he repeated that message in his first 
inaugural address: 

Apprehension seems to exist among the people of the Southern 
States that by the accession of a Republican aclministration their 
property and their peace and personal security are to be 
endangered.... I have no purpose, directly or indirectly, to interfere 
with the institution of slavery in the states where it now exists. I 
believe I have no lawful right to do so, and I have no inclination to do 
so. 1 

Even after the outbreak of war in 1861, Lincoln confirmed his 
previous stand. He declared: 

My paramount object in this struggle is to save the Union, and it is 
not either to save or destroy slavery. If I could save the Union without 
freeing any slave, I would do it; and if I could save it by freeing all the 
slaves, I would do it; and if I could do it by freeing some and leaving 
others alone, I would also do that. 2 

It may come as a surprise to learn that, by strict definition, 
Abraham Lincoln was a white supremacist. In his fourth debate 
with Senator Stephen Douglas, he addressed the subject bluntly: 

I am not nor ever have been in favor of bringing about in any way 
the social and political equality of the white and black races — that I am 

1. Don E. Fehrenbacher, ed., Abraham Lincoln: Speeches and Writings, 1859-1865 
(New York: Library of America, 1989), p. 215. 

2. Quoted by Robert L. Polley, ed., Lincoln: His Words and His World (Waukesha, 
Wisconsin: Country Beautiful Foundation, 1965), p. 54. 



not nor ever have been in favor of making voters or jurors of Negroes, 
nor of qualifying them to hold office, nor to intermarry with white 
people; and I will say in addition to this that there is a physical 
difference between the white and black races which I believe will 
forever forbid the two races living together on terms of social and 
political equality. And inasmuch as they cannot so live, while they do 
remain together there must be the position of superior and inferior, 
and I as much as any other man am in favor of having the superior 
position assigned to the white race. 1 

This is not to say that Lincoln was indifferent to the institution 
of slavery, for he felt strongly that it was a violation of personal and 
national morality, but he also knew that slavery was gradually 
being swept away all over the world— with the possible exception 
of Africa itself— and he believed that it would soon disappear in 
America simply by allowing the natural forces of enlightenment to 
work their way through the political system. He feared — and 
rightly so— that to demand immediate and total reform, not only 
would destroy the Union, it would lead to massive bloodshed and 
more human suffering than was endured even under slavery itself. 
He said: 

I have not allowed myself to forget that the abolition of the Slave 
trade by Great Britain was agitated a hundred years before it was a 
final success; that the measure had its open fire-eating opponents; its 
stealthy "don't-care" opponents; its dollar-and-cent opponents; its 
inferior-race opponents; its Negro-equality opponents; and its religion 
and good-order opponents; that all these opponents got offices, and 
their adversaries got none. But I have also remembered that though 
they blazed like tallow-candles for a century, at last they flickered in 
the socket, died out, stank in the dark for a brief season, and were 
remembered no more, even by the smell. School boys know that 
Wilbeforce and Granville Sharpe helped that cause forward; but who 
can now name a single man who labored to retard it? Remembering 
these things I cannot but regard it as possible that the higher object of 
this contest may not be completely attained within the term of my 
natural life. 

If Lincoln's primary goal in the War was not the abolition of 
slavery but simply to preserve the Union, the question arises: Why 
did the Union need preserving? Or, more pointedly, why did the 
Southern states want to secede? 

1- Fehrenbacher, p. 636. 

2- Ibid., p. 438. 



The South, being predominantly an agricultural region, had to 
import practically all of its manufactured goods from the Northern 
states or from Europe, both of which reciprocated by providing a 
market for the South' s cotton. However, many of the textiles and 
manufactured items were considerably cheaper from Europe, even 
after the cost of shipping had been added. The Southern states, 
therefore, often found it to their advantage to purchase these 
European goods rather than those made in the North. This put 
considerable competitive pressure on the American manufacturers 
to lower their prices and operate more efficiently. 

The Republicans were not satisfied with that arrangement. 
They decided to use the power of the federal government to tip the 
scales of competition in their favor. Claiming that this was in the 
"national interest," they levied stiff import duties on almost every 
item coming from Europe that was also manufactured in the North. 
Not surprisingly, there was no duty applied to cotton which, 
presumedly, was not a commodity in the national interest. One 
result was that European countries countered by stopping the 
purchase of U.S. cotton, which badly hurt the Southern economy. 
The other result was that manufacturers in the North were able to 
charge higher prices without fear of competition, and the South 
was forced to pay more for practically all of its necessities. It was a 
classic case of legalized plunder in which the law was used to 
enrich one group of citizens at the expense of another. 

Pressure from the North against slavery in the South made 
matters even more volatile. A fact often overlooked in this episode 
is that the cost of a slave was very high, around $1,500 each. A 
modest plantation with only forty or fifty slaves, therefore, had a 
large capital investment which, in terms of today's purchasing 
power, represented many millions of dollars. To the South, there- 
fore, abolition meant, not only the loss of its ability to produce a 
cash crop, but the total destruction of an enormous capital base. 

Many Southern plantation owners were working toward the 
day when they could convert their investment to more profitable 
industrial production as had been done in the North, and others fell 
that freemen who were paid wages would be more efficient than 
slaves who had no incentive to work. For the present, however, 
they were stuck with the system they inherited. They felt that a 


complete and sudden abolition of slavery with no transition period 
would destroy their economy and leave many of the former slaves 
to starve— all of which actually happened in due course. 1 

That was the situation that existed at the time of Lincoln's 
campaign and why, in his speeches, he attempted to calm the fears 
of the South about his intentions. But his words were mostly 
political rhetoric. Lincoln was a Republican, and he was totally 
dependent on the Northern industrialists who controlled the Party. 
Fven if he had wanted to— and there is no indication that he 
did— he could not have reversed the trend of economic favoritism 
and protectionism that swept him into office. 


In addition to the conflicting interests between North and 
South, there were other forces also working to split the nation in 
two. Those forces were rooted in Europe and centered around the 
desire of France, Spain, and England to control the markets of Latin 
America. Mexico was the prime target. This was the reason the 
Monroe Doctrine had been formulated thirty-eight years pre- 
viously. President James Monroe had put the European nations on 
notice that the United States would not interfere in their affairs, and 
that any interference by them in American affairs would not be 
tolerated. In particular, the proclamation said that the American 
continents were no longer to be considered as available for 

None of the European powers wanted to put this issue to the 
test, but they knew that if the United States were to become 
embroiled in a civil war, it could not also cross swords in Latin 
America. To encourage war between the states, therefore, was to 
pave the way for colonial expansion in Mexico. The Americas had 
become a giant chess board for the game of global politics. 

In the American Heritage Picture History of the Civil War, we read: 

The war had not progressed very far before it was clear that the 
ruling classes in each of these two countries [England and France] 
sympathized strongly with the Confederacy — so strongly that with 
just a little prodding they might be moved to intervene and bring 

about Southern independence by force of arms Europe's 

aristocracies had never been happy about the prodigious success of 

1- See "No Civil War at All; Part One," by William Mcllhany, Journal of Individualist 
Studies, Winter, 1992, p. 41. 


the Yankee democracy. If the nation now broke into halves, proving 
that democracy did not contain the stuff of survival, the rulers of 
Europe would be well pleased. 

The global chess match between Lincoln on the one side and 
England and France on the other was closely watched by the other 
leaders of Europe. One of the most candid observers at that time 
was the Chancellor of Germany, Otto von Bismarck. Since Bismarck 
was, himself, deeply obligated to the power of international 
finance, his observations are doubly revealing. He said: 

The division of the United States into federations of equal force 
was decided long before the Civil War by the high financial powers of 
Europe. These bankers were afraid that the United States, if they 
remained in one block and as one nation, would attain economic and 
financial independence, which would upset their financial domination 
over the Europe and the world. Of course, in the "inner circle" of 
Finance, the voice of the Rothschilds prevailed. They saw an 
opportunity for prodigious booty if they could substitute two feeble 
democracies, burdened with debt to the financiers,... in place of a 
vigorous Republic sufficient unto herself. Therefore, they sent their 
emissaries into the field to exploit the question of slavery and to drive 
a wedge between the two parts of the Union.... The rupture between 
the North and the South became inevitable; the masters of European 
finance employed all their forces to bring it about and to turn it to their 

The strategy was simple but effective. Within months after the 
first clash of arms between North and South, France had landed 
troops in Mexico. By 1864, the Mexicans were subdued, and the 
French monarch installed Ferdinand Maximilian as the puppet 
emperor. The Confederacy found a natural ally in Maximilian, and 
it was anticipated by both groups that, after the successful execu- 
tion of the War, they would combine into a new nation — 
dominated by the financial power of Rothschild, of course. At the 
same time, England moved eleven-thousand troops into Canada, 

1. Bruce Catton, author; Richard M. Ketchum, ed., The American Heritage Picture 
History of the Civil War (New York: American Heritage Publishing Co., 1960), p. 249. 

2. This statement was quoted by Conrad Siem, a German who became a U.S. 
citizen and who wrote about the lifeand views of Bismark. It was published in La 
Vieille France, No. 216, March 17-24, 1921, pp. 13-16. The reader should be 
cautioned that Bismarck was no paragon of virtue and, as the father of modern 
socialism, his political views should be taken with a healthy degree of caution. All 
that aside, there is little doubt that this quotation represents an accurate appraisal 
of the machinations of the European Cabal at that time. 



positioned them menacingly along the Union's northern flank, and 
placed the British fleet onto war-time alert. 1 

The European powers were closing in for a checkmate. 


The Second Bank of the United States was dead, but banking 
was very much alive. Many of the old problems continued, and 
new ones arrived. The issuance of banknotes had been severely 
limited, but that was largely offset by the increasing use of 
checkbook money, which had no limits at all on its issue. 

When the Bank of the U.S. slipped into history, the nation was 
nearing the end of the boom phase of a boom/bust cycle. When the 
inevitable contraction of the money supply came, politicians began 
to offer proposals on how to infuse stability into the banking 
system. None dealt with the real problem, which was fractional- 
reserve banking itself. They concentrated instead on proposals on 
how to make it work. All of these proposals were tried and they 

These years are sometimes described as a period of free 
banking, which is an insult to truth. All that happened was that 
banks were converted from corporations to private associations, a 
change in form, not substance. They continued to be burdened by 
government controls, regulations, supports, and other blocks 
against the free market. 

The economic chaos and conflict of this period was a major 
cause of the Civil War. Lincoln made it clear during his public 
speeches that slavery was not the issue. The basic problem was the 
North and the South were dependent on each other for trade. The 
industrialized North sold its products to the South which sold its 
cotton to the North. The South also had a similar trade with 
Europe, and that was an annoyance to the North. Europe was 
selling many products at lower prices, and the North was losing 
market share. Northern politicians passed protectionist legislation 
putting import duties on industrial products. This all but stopped 
the importation of European goods and forced the South to buy 
from the North at higher prices. Europe retaliated by curtailing the 
purchase of American cotton. That hurt the South even more. It was 
a classic case of legalized plunder, and the South wanted out. 

1. Catton and Ketchum, p. 250. Also Otto Eisenschiml, The Hidden Face of the Civil 
War (New York: Bobbs-Merril, 1961), p. 25. 




Meanwhile, there were powerful forces in Europe that wanted 
to see America embroiled in civil war. If she could be split into two 
hostile countries, there would be less obstacle to European expan- 
sion on the North American continent. France was eager to capture 
Mexico and graft it onto a new empire which would include many 
of the Southern states as well. England, on the other hand, had 
military forces poised along the Canadian border ready for action. 
Political agitators, funded and organized from Europe, were active 
on both sides of the Mason-Dixon line. The issue of slavery was but 
a ploy. America had become the target in a ruthless game of world 
economics and politics. 

Chapter Nineteen 


The causes of the Civil War shown to be economic 
and political, not the issue of freedom vs. slavery; 
the manner in which both sides used fiat money to 

finance the war; the important role played by 

foreign powers. 

In the previous chapter, we saw how the American continent 
had become a giant chess board in a game of global politics. The 
European powers had been anxious to see the United States 
become embroiled in a civil war and eventually break into two 
smaller and weaker nations. That would pave the way for their 
further colonization of Latin America without fear of the Ameri- 
cans being able to enforce the Monroe Doctrine. And so it was that, 
within a few months after the outbreak of war between North and 
South, France landed troops in Mexico and, by 1864, had installed 
Maximilian as her puppet monarch. Negotiations were begun 
immediately to bring Mexico into the war on the side of the 
Confederacy. England moved her troops to the Canadian border in 
a show of strength. America was facing what appeared to be a 
checkmate from the powers in Europe. 


It was a masterful move that possibly could have won the game 
had not an unexpected event tipped the scale against it. Tsar 
Alexander II — who, incidentally, had never allowed a central bank 
to be established in Russia 1 — notified Lincoln that he stood ready 
to militarily align with the North. Although the Tsar had recently 
freed the serfs in his own country, his primary motivation for 

1- His grandson, Tsar Nicholas, II, did accept loans from J. P. Morgan. In a classic 
application of the Rothschild Formula, Morgan also funded the Mensheviks and the 
Bolsheviks. The Mensheviks forced Nicholas to abdicate, and the Bolsheviks exe- 
cuted him. See Chernow, pp. 195, 211. 



coming to the aid of the Union undoubtedly had little to do with 
emancipating the slaves in the South. England and France had been 
maneuvering to break up the Russian empire by splitting off 
Finland, Estonia, Latvia, Poland, Crimea, and Georgia. Napoleon 
III, of France, proposed to Great Britain and Austria that the three 
nations immediately declare war on Russia to hasten this dismem- 

Knowing that war was being considered by his enemies, Tsar 
Alexander decided to play a chess game of his own. In September 
of 1863, he dispatched his Baltic fleet of war ships to Alexandria, 
Virginia, and his Asiatic fleet to San Francisco. The significance of 
this move was explained by Russian-born Carl Wrangell- 

No treaty was signed between Russia and the United States, but 
their mutual interest, and the threat of war to both, unified these two 
nations at this critical moment. By dispatching his Baltic Fleet to the 
North American harbors, the Tsar changed his position from a 
defensive to an offensive one. Paragraph 3 of the instructions given to 
Admiral Lessovsky by Admiral Krabbe, at that time Russian Secretary 
of the Navy, dated July 14th, 1863, ordered the Russian Fleet, in case of 
war, to attack the enemies' commercial shipping and their colonies so 
as to cause them the greatest possible damage. The same instructions 
were given to Admiral Popov, Commander of the Russian Asiatic 
Fleet. 1 

The presence of the Russian Navy helped the Union enforce a 
devastating naval blockade against the Southern states which 
denied them access to critical supplies from Europe. It was not that 
these ships single-handedly kept the French and English vessels at 
bay. Actually there is no record of them even firing upon each 
other, but that is the point. The fact that neither France nor England 
at that time wanted to risk becoming involved in an open war with 
the United States and Russia led them to be extremely cautious with 
overt military aid to the South. Throughout the entire conflict, they 
found it expedient to remain officially neutral. Without the inhibit- 
ing effect of the presence of the Russian fleet, the course of the war 
could have been significantly different. 

1. Carl Wrangell-Rokassowsky, Before the Storm (Ventimiglia, Italy: Tipo- 
Litografia Ligure, 1972), p. 57. 


The beginning of the war did not go well for the North, and in 
the early years, the outcome was far from certain. Not only did the 
Union army face repeated defeats on the battlefield, but enthusi- 
asm from the people at home was badly sagging. As mentioned 
previously, at the outset this was not a popular war based on 
humanitarian principle; it was a war of business interests. That 
presented two serious problems for the North. The first was how to 
get people to fight, and the second was how to get them to pay. 
Both problems were solved by the simple expediency of violating 
the Constitution. 


To get people to fight, it was decided to convert the war into an 
anti-slavery crusade. The Emancipation Proclamation was primar- 
ily a move on the part of Lincoln to fan the dying embers of support 
for the "Rich-man's war and the poor-man's fight," as it was 
commonly called in the North. Furthermore, it was not an amend- 
ment to the Constitution nor even an act of Congress. It was issued, 
totally without constitutional authority, as the solitary order of 
Lincoln himself, acting as Commander-in-Chief of the armed forces. 

Preservation of the Union was not enough to fire men's 
enthusiasm for war. Only the higher issue of freedom could do 
that. To make the cause of freedom synonymous with the cause of 
the North, there was no alternative but to officially declare against 
slavery. After having emphasized over and over again that slavery 
was not the reason for war, Lincoln later explained why he changed 
his course and issued the Proclamation: 

Things had gone from bad to worse until I felt we had reached the 
end of our rope on the plan we were pursuing; that we had about 
played our last card, and must change our tactics or lose the game. I 
now determined upon the adoption of the emancipation policy. 1 

The rhetoric of the Proclamation was superb, but the concept 
left a great deal to be desired. Bruce Catton, writing in the American 
Heritage Pictorial History of the Civil War explains: 

Technically, the proclamation was almost absurd. It proclaimed 
freedom for all slaves in precisely those areas where the United States 
could not make its authority effective, and allowed slavery to continue 
in slave states which remained under Federal control.... But in the end 

1. Quoted by Charles Adams, Fight, Flight, Fraud: The Story of Taxation (Curacao, 
The Netherlands: Euro-Dutch Publishers, 1982), p. 229. 


it changed the whole character of the war and, more than any other 
single thing, doomed the Confederacy to defeat. 1 

The Proclamation had a profound impact on the European 
powers as well. As long as the war had been viewed as an attempt 
on the part of a government to put down rebellion, there was 
nothing sacred about it, and there was no stigma attached to 
helping either side. But now that freedom was the apparent issue, no 
government in Europe — least of all England and France — dared to 
anger its own subjects by taking sides against a country that was 
trying to destroy slavery. After 1862 the chance that Europe would 
militarily intervene on behalf of the Confederacy rapidly faded to 
zero. On the propaganda front, the South had been maneuvered 
into a position which could not be defended in the modern world. 

Converting the war into an antislavery crusade was a brilliant 
move on Lincoln's part, and it resulted in a surge of voluntary 
recruits into the Union army. But this did not last. Northerners may 
have disapproved of slavery in the South but, once the bloodletting 
began in earnest, their willingness to die for that conviction began 
to wane. At the beginning of the war, enlistments were for only 
three months and, when that period was over, many of the soldiers 
declined to renew. Lincoln faced the embarrassing reality that he 
soon would have no army to carry on the crusade. 


Historically, men are willing to take up arms to defend their 
families, their homes, and their country when threatened by a 
hostile foe. But the only way to get them to fight in a war in which 
they have no perceived personal interest is either to pay them large 
bonuses and bounties or to force them to do so by conscription. It is 
not surprising, therefore, that both methods were employed to 
keep the Union army in the field. Furthermore, although the 
Constitution specifies that only Congress can declare war and raise 
an army, Lincoln did so entirely on his own authority. 

The Northern states were given an opportunity to fill a speci- 
fied quota with volunteers before conscription began. To meet 
these quotas and to avoid the draft, every state, township, and 
county developed an elaborate bounty system. By 1864, there were 

1. Catton and Ketchum, p. 252. 

2. Congress later ratified Lincoln's actions, but, by that time, it had little choice. 
The War was underway. 


many areas where a man could receive more than $1,000 — 
equivalent to over $50,000 today— just for joining the army. A 
person of wealth could avoid the draft simply by paying a 
commutation fee or by hiring someone else to serve in his place. 

In the South, the government was even more bold in its 
approach to conscription. Despite its cherished views on states' 
rights, the Confederacy immediately gathered into Richmond 
many of the powers and prerogatives of a centralized, national 
government. In 1862 it passed a conscription law which placed 
exclusive control over every male citizen between the ages of 
eighteen and thirty-five into the hands of the Confederate Presi- 
dent. As in the North, there were important loopholes. The owner 
or overseer of twenty slaves, for example, could not be called into 
military service. 1 In all fairness, it must be noted that many did not 
take advantage of this exclusion. In contrast to the North, soldiers 
perceived that they were fighting for the defense of their families, 
homes, and property rather than for an abstract cause or for a cash 


When conscription was initiated by Lincoln in 1863, people in 
the North were outraged. In New York's Madison Square, 
thousands of protesters marched in torch parades and attended 
anti-Lincoln rallies. Historian James Horan describes the mood: 
"When caricatures of the President were lifted above the speaker's 
stand, hisses rose to fill the night with the noise of a million angry 
bees." Federal troops eventually had to be called in to put down 
antidraft riots in Ohio and Illinois. In New York City, when the first 
names of the draft were published in the papers on July 12, mobs 
stormed the draft offices and set fire to buildings. The riots 
continued for four days and were suppressed only when the 
federal Army of the Potomac was ordered to fire into the crowds. 
Over a thousand civilians were killed or wounded. 3 

After the passage of many years, it is easy to forget that Lincoln 
had an insurrection on his hands in the North as well as in the 
South. The shooting of a thousand civilians by soldiers of their own 

1. Catton and Ketchum, pp. 484-85. 

2. James D. Horan, Confederate Agent: A Discovery in History (New York: Crown, 
1954), p. 209. 

3. Catton and Ketchum, pp. 486,511. 


government is a tragedy of mammoth proportions and it tells much 
about the desperate state of the Union at that time. To control that 
insurrection, Lincoln ignored the Constitution once again by sus- 
pending the right of habeas corpus, which made it possible for the 
government to imprison its critics without formal charges and 
without trial. Thus, under the banner of opposing slavery, 
American citizens in the North, not only were killed on the streets 
of their own cities, they were put into military combat against their 
will and thrown into prison without due process of law. In other 
words, free men were enslaved so that slaves could be made free. 
Even if the pretended crusade had been genuine, it was a bad 

How to get people to pay for the war was handled in a similar 
fashion. If the Constitution could be pushed aside on the issue of 
personal rights and of war itself, it certainly would not stand in the 
way of mere funding. 

It has often been said that truth is the first casualty in war. To 
which we should add: money is the second. During the fiscal year 
ending in 1861, expenses of the federal government had been 
$67 million. After the first year of armed conflict they were 
$475 million and, by 1865, had risen to one billion, three-hundred 
million dollars. On the income side of the ledger, taxes covered only 
about eleven per cent of that figure. By the end of the war, the 
deficit had risen to $2.61 billion. That money had to come from 


The nation's first experiment with the income tax was tried at 
this time; another violation of the Constitution. By today's stand- 
ards it was a small bite, but it was still an extremely unpopular 
measure, and Congress knew that any additional taxes would 
further fan the flames of rebellion. 

Previously, the traditional source of funding in time of war had 
been the banks which simply created money under the pretense of 
loaning it. But that method had been severely hampered by the 
demise of the Bank of the United States. The state banks were 
anxious to step into that role; but, by this time, most of them had 
already defaulted in their promise to pay in specie and were in no 
position to manufacture further money, at least not money which 
the public would be willing to accept. 


American banks may have been unable to supply adequate 
loans, but the Rothschild consortium in Britain was both able and 
willing. It was during this time that the Rothschilds were consoli- 
dating their new industrial holdings in the United States through 
their agent, August Belmont. Derek Wilson tells us: "They owned 
or had major shareholdings in Central American ironworks, North 
American canal construction companies, and a multiplicity of other 
concerns. They became the major importers of bullion from the 
newly discovered goldfields." 1 

Belmont had placed large amounts of Rothschild money into 
the bonds of state-sponsored banks in the South. Those bonds, of 
course, had fallen in value to practically zero. As the war shifted in 
favor of the North, however, he began to buy up as many 
additional bonds as he could, paying but a few pennies on each 
dollar of face value. It was his plan to have the Union force the 
Southern states at the end of the war to honor all of their pre-war 
debt obligations — in full. That, of course, would have been a source 
of gigantic speculative profits to the Rothschilds. Meanwhile, on 
the northern side of the Mason-Dixon Line, Belmont became the 
chief agent for the sale of Union bonds in England and France. It 
was rumored that, when Belmont called on President Lincoln and 
personally offered Rothschild money at 27 V2 per cent interest, he 
was rudely thrown out of the office. The story is doubtful, but it 
represents a larger truth. Profiting from war and placing money on 
both sides of the conflict were exactly the kind of maneuvers for 
which the Rothschilds had become famous throughout Europe and 
were now practicing in America. 

In the North, the sale of government bonds was the one 
measure for raising funds that seemed to work. Even that, 
however, with the lure of compounded interest to be paid in gold at 
a future date, failed to raise more than about half the needed 
amount. So the Union faced a real dilemma. The only options 
remaining were (1) terminate the war or (2) print fiat money. For 
Lincoln and the Republicans who controlled Congress, the choice 
Was never seriously in doubt. 

The precedent had already been set during the War of 1812. At 
that time, Secretary of the Treasury, Albert Gallatin, had abrogated 
the Constitutional ban against "bills of credit" by printing Treasury 

1 • See Derek Wilson, p. 178. 



notes, most of which paid interest at 5.4 per cent. The money was 
never declared legal tender, and that probably was the basis on 
which it was defended as constitutional. 


By the time of the War Between the States, however, all 
pretense at constitutionality had been dropped. In 1862, Congress 
authorized the Treasury to print $150 million worth of bills of credit 
and put them into circulation as money to pay for its expenses. 
They were declared as legal tender for all private debts but could 
not be used for government duties or taxes. The notes were printed 
with green ink and, thus, became immortalized as "greenbacks." 
Voters were assured that this was a one-time emergency measure, a 
promise that was soon broken. By the end of the war, a total of 
$432 million in greenbacks had been issued. 

The pragmatic mood in Washington was that a constitution is 
nice to have in times of peace, but an unaffordable luxury in war. 
Salmon P. Chase, for example, as Secretary of the Treasury, 
strongly endorsed the greenbacks which were issued under his 
direction. They were, in his words, an "indispensable necessity." 
Eight years later, as Chief Justice of the Supreme Court, he declared 
that they were unconstitutional. Had he changed his mind? Not at 
all. When he endorsed them, the nation was at war. When he 
declared them unconstitutional, it was at peace. It was merely 
another example of the universal trait of all governments in time of 
war. That trait was presented in a previous section as the premise 
of the Rothschild Formula: "The sanctity of its laws, the prosperity 
of its citizens, and the solvency of its treasury will be quickly 
sacrificed by any government in its primal act of self-survival." 

The pressure for issuance of greenbacks originated in Congress, 
but Lincoln was an enthusiastic supporter. His view was that: 

Government, possessing power to create and issue currency and 
credit as money and enjoying the right to withdraw currency and 
credit from circulation by taxation and otherwise, need not and should 
not borrow capital at interest.... The privilege of creating and issuing 
money is not only the supreme prerogative of the government but it is 
the government's greatest creative opportunity. 

1. This is taken from an abstract of Lincoln's monetary policy that was prepared 
by the Legislative Reference Service of the Library of Congress. Quoted by Owen, 
p. 91. 


It would appear that Lincoln objected to having the govern- 
ment pay interest to the banks for money they create out of nothing 
when the government can create money out of nothing just as easily 
and not pay interest on it. If one ignores the fact that both of these 
schemes are forbidden by the Constitution and is willing to tolerate 
the plunder-by-inflation that is the consequence of both, then there 
is an appealing logic to the argument. The politicians continue to 
have their fiat money, but at least the banks are denied a free ride. 


It is apparent that Lincoln had undergone a change of heart 
regarding banks. Early in his political career, he had been a friend 
of the banking industry and an advocate of easy credit. As a 
member of the Whig political party in the 1830s— before becoming 
a Republican in his campaign for the Presidency— he had been a 
supporter of Biddle's Second Bank of the United States. 1 During his 
famous debates with Senator Stephen Douglas, one of the points of 
contention between the two was that Lincoln defended the Bank 
and advocated its reestablishment. Furthermore, after becoming 
President, he took the initiative in requesting Congress to reestab- 
lish central banking. 2 

Lincoln appears to have been inconsistent, and one gets a 
gnawing feeling that, in his effort to finance an unpopular war, he 
sometimes found it necessary, like Salmon Chase and other politi- 
cians of the time, to anesthetize his personal convictions and do 
whatever was required to meet the exigencies of governmental 

One thing, however, is clear. Regardless of Lincoln's personal 
views on money, the greenbacks were not pleasing to the bankers 
who were thereby denied their customary override on government 
debt. They were anxious to have this federal fiat money replaced by 
bank fiat money. For that to be possible, it would be necessary to 
create a whole new monetary system with government bonds used 
as backing for the issuance of bank notes; in other words, a return 
to central banking. And that was precisely what Secretary Chase 
was preparing to establish. 

1- See Lincoln's speech on the Sub-Treasury, Fehrenbacher, pp. 56-57. 

2. See Lincoln's annual message to Congress, December 1, 1862, Fehrenbacher, 

p. 398. 


In 1862, the basic position of the bankers was outlined in a 
memo, called The Hazard Circular, prepared by an American agent 
of British financiers and circulated among the country's wealthy 
businessmen. It said: 

The great debt that capitalists will see to it is made out of the war 
must be used as a means to control the volume of money. To 
accomplish this the bonds must be used as a banking basis. We are 
now waiting for the Secretary of the Treasury to make this 
recommendation to Congress. It will not do to allow the greenback, as 
it is called, to circulate as money any length of time, as we cannot 
control that. But we can control the bonds and through them the bank 
issues. 1 


On February 25, 1863, Congress passed the National Banking 
Act (with major amendments the following year) which established 
a new system of nationally-chartered banks. The structure was 
similar to the Bank of the United States with the exception that, 
instead of one central bank with power to influence the activities of 
the others, there were now to be many national banks with control 
over all of them coming from Washington. Most banking legisla- 
tion is sold to the public under the attractive label of reform. The 
National Banking Act was one of the rare exceptions. It was 
promoted fairly honestly as a wartime emergency scheme to raise 
money for military expenses by creating a market for government 
bonds and then transforming those bonds into circulating money. 
Here is how it worked: 

When a national bank purchased government bonds, it did not 
hold on to them. It turned them back to the Treasury which 
exchanged them for an equal amount of "United States Bank 
Notes" with the bank's name engraved on them. The government 
declared these to be legal tender for taxes and duties, and that 
status caused them to be generally accepted by the public as 
money. The bank's net cost for these bonds was zero, because they 
got their money back immediately. Technically, the bank still 
owned the bonds and collected interest on them, but they also had 
the use of an equal amount of newly created bank-note money 
which also could be loaned out at interest. When all the smoke and 

1. The Hon. Charles A. Lindburgh, Banking and Currency and the Money Trust 
(Washington, D.C.: National Capital Press, 1913), p. 102. 


mirrors were moved away, it was merely a variation on the ancient 
scheme. The monetary and political scientists had simply converted 
government debt into money, and the bankers were collecting a 
substantial fee at both ends for their service. 

The one shortcoming of the system, at least from the point of 
view of the manipulators, was that, even though the bank notes 
were widely circulated, they were not classified as "lawful" money. 
In other words, they were not legal tender for all debts, just for 
taxes and duties. Precious-metal coins and greenbacks were still the 
country's official money. It was not until the arrival of the Federal 
Reserve System fifty years later that government debt in the form 
of bank notes would be mandated as the nation's official money for 
all transactions— under penalty of law. 

The National Banking Act of 1863 required banks to keep a 
percentage of their notes and deposits in the form of lawful money 
(gold coins) as a reserve to cover the possibility of a run. That 
percentage varied depending on the size and location of the bank 
but, on an average, it was about twelve per cent. That means a bank 
with $1 million in coin deposits could use approximately $880,000 
of that ($1 million less 12%) to purchase government bonds, 
exchange the bonds for bank notes, lend out the bank notes, and 
collect interest on both the bonds and the loans. The bank could now 
earn interest on $880,000 loaned to the government in the form of 
coins plus interest on $880,000 loaned to its customers in the form of 
bank notes. 1 That doubled the bank's income without the incon- 
venience of having to increase its capital. Needless to say, the 
bonds were gobbled up just as fast as they could be printed, and the 
problem of funding the war had been solved. 

Another consequence of the national banking system was to 
make it impossible from that date forward for the federal govern- 
ment ever to get out of debt. Please reread that statement. It is not 
an exaggeration. Even friends of central-banking are forced to 
admit this reality. Galbraith says gloomily: 

Rarely has economic circumstance managed more successfully to 
confound the most prudent in economic foresight. In numerous years 

1- That represents the theoretical maximum. The actual numbers would have been 
slightly less due to the fact that banks seldom were able to keep a full 100% of their 
bank notes circulating in the form of loans. The functional asset leverage probably 
averaged about 70% rather than 88%. 



following the war the Federal government ran a heavy surplus. It 
could not pay off its debt, retire its securities, because to do so meant 
there would be no bonds to back the national bank notes. To pay off 
the debt was to destroy the money supply. 1 

As pointed out in a previous section, that is essentially the 
situation which exists today. Every dollar of our currency and 
checkbook money was created by the act of lending. If all debt were 
repaid, our entire money supply would vanish back into the 
inkwells and computers. The national debt is the principal founda- 
tion upon which money is created for private debt. 2 To pay off or 
even greatly reduce the national debt would cripple our monetary 
system. No politician would dare to advocate that, even if surplus 
funds were available in the Treasury. The Federal Reserve System, 
therefore, has virtually locked our nation into perpetual debt. 


The third consequence of the National Banking Act will come 
as no surprise to anyone who has survived the previous pages of 
this book. During the war, the purchasing power of the greenbacks 
fell by 65%. The money supply increased by 138%. Prices more than 
doubled while wages rose by less than half. By that mechanism, 
Americans surrendered to the government and to the banks more 
than half of all the money they earned or held during that 
period— in addition to their taxes. 3 

Financial conditions in the South were even worse. With the 
exception of the seizure of about $400,000 in gold from the Federal 
mint at New Orleans, almost all of the war was funded by the 
printing of fiat money. Confederate notes increased in volume by 
214% per year, while the volume of all money, including bank 
notes and check-book money, rose by over 300% per year. In 
addition to the Confederate notes, each of the Southern states 
issued its own fiat money and, by the end of the war, the total of all 
notes was about a billion dollars. Within the four-year period, 
prices shot up by 9,100%. After Appomattox, of course, Confeder- 
ate notes and bonds alike were totally worthless. 4 

1. Galbraith, p. 90. 

2. See chapter ten. The Mandrake Mechanism. 

3. See Paul and Lehrman, pp. 80-81; Groseclose, Money and Man, p. 193; Galbraith, 
pp. 93-94; Rothbard, Mystery, p. 222. 

4. See Galbraith, p. 94. Also Paul and Lehrman, p. 81. 


As usual, the average citizen did not understand that the newly 
created money represented a hidden tax which he would soon have 
to pay in the form of higher prices. Voters in the Northern states 
certainly would not have tolerated an open and honest tax increase 
of that magnitude. Even in the South where the cause was 
perceived as one of self defense, it is possible that they would not 
have done so had they known in advance the true dimension of the 
assessment. But especially in the North, because they did not 
understand the secret science of money, Americans not only paid 
the hidden tax but applauded Congress for creating it. 

On June 25, 1863, exactly four months after the National Bank 
Act was signed into law, a confidential communique was sent from 
the Rothschild investment house in London to an associate banking 
firm in New York. It contained an amazingly frank and boastful 

The few who understand the system [bank loans earning interest 
and also serving as money] will either be so interested in its profits or 
so dependent upon its favors that there will be no opposition from that 
class while, on the other hand, the great body of people, mentally 
incapable of comprehending,... will bear its burdens without 


Lincoln was privately apprehensive about the Bank Act, but 
loyalty to his Party and the need to maintain unity in time of war 
compelled him to withhold his veto. His personal view, however, 
was unequivocal. In a letter to William Elkins the following year he 

The money power preys upon the nation in times of peace and 
conspires against it in times of adversity. It is more despotic than 
monarchy, more insolent than autocracy, more selfish than 
bureaucracy. I see in the near future a crisis approaching that unnerves 
me and causes me to tremble for the safety of my country. 
Corporations have been enthroned, an era of corruption will follow, 
and the money power of the country will endeavor to prolong its reign 
by working upon the prejudices of the people, until the wealth is 
aggregated in a few hands, and the republic destroyed. 

1« Quoted by Owen, pp. 99-100. 

2- A letter to William F. Elkins, November 21, 1864. Archer H. Shaw, ed., The 
Lincoln Encyclopedia: The Spoken and Written Words of A. Lincoln (New York: 
Macmillan Co., 1950), p. 40. 


In reviewing Lincoln's role throughout this painful chapter of 
history, it is impossible not to feel ambivalence. On the one hand, 
he declared war without Congress, suspended the writ of habeas 
corpus, and issued the Emancipation Proclamation, not as an 
administrative executive carrying out the wishes of Congress, but 
as the Commander-in-Chief of the armed forces. Furthermore, the 
Proclamation was not issued out of humanitarian motives, as 
popular history portrays, but as a maneuver to generate popular 
support for the war. By participating in the issuance of the 
greenbacks, he violated one of the most clearly written and 
important sections of the Constitution. And by failing to veto the 
National Bank Act, he acquiesced in the delivery of the American 
people back into the hands of the international Cabal, an act which 
was similar in many ways to the forcible return of captured 
runaway slaves. 

On the positive side, there is no question of Lincoln's patriot- 
ism. His concern was in preserving the Union, not the Constitution, 
and his refusal to let the European powers split America into a 
cluster of warring nation-states was certainly wise. Lincoln 
believed that he had to violate part of the Constitution in order to 
save the whole. But that is dangerous reasoning. It can be used in 
almost any national crisis as the excuse for the expansion of 
totalitarian power. There is no reason to believe that the only way 
to save the Union was to scrap the Constitution. In fact, if the 
Constitution had been meticulously observed from the very begin- 
ning, the Southern minority could never have been legally plun- 
dered by the Northern majority and there likely would have been, 
no movement for secession in the first place. And, even if there had 
been, a strict reading of the Constitution at that point could have 
led the way to an honorable and peaceful settlement of differences. 
The result would have been, not only the preservation of the Union 
without war, but Americans would be enjoying far less government 
intervention in their daily lives today. 


There is one point that is clearly on Lincoln's side. While his 
political compatriots were howling for economic vengeance against 
the South, the President stood firmly against it. "With malice 
toward none" was more than a slogan with him, and he was willing 
to risk his political survival on that one issue. The reason he had 


vetoed the Wade-Davis emancipation bill was because it would 
have applied a lien against Southern cotton at the end of the war to 
the benefit of New England textile manufactures. The cotton also 
would have been taken as security to pay off Southern debt which 
had been contracted before the war, thus providing the funds to 
buy back at face value all of the bonds which had been purchased at 
discount by Rothschild's agent, August Belmont. Such defiance of 
the financiers and speculators undoubtedly required great courage. 

But the issue ran deeper than that. Lincoln had offered a 
general amnesty to any citizen in the South who would agree to 
take a loyalty oath to the Union. When ten per cent of the voters 
had taken such an oath, he proposed that they could then elect 
Congressmen, Senators, and a state government which would be 
recognized as part of the Union once again. The Republicans, on 
the other hand, had incorporated into the Wade-Davis bill the 
provision that each seceded state was to be treated like a conquered 
country. Political representation was to be denied until fifty-one 
per cent, not ten per cent, had taken an oath. Former slaves were 
given the right to vote — although women had not yet gained that 
right even in the North— but, because of their lack of education and 
political awareness, no one expected them to play a meaningful 
role in government for many years to come. Furthermore, those 
taking the oath had to swear that they had never taken up arms 
against the Union. Since almost every able-bodied white male had 
done so, the effect would have been to deny the South political 
representation for at least two generations. 

Under Lincoln's amnesty policy, it would not be long before the 
Republicans would be overwhelmed in Congress by a large major- 
ity of Democrats. The Democrats in the North were already gaining 
strength on their own and, once they could be joined by the solid 
block of Democrats from the reunited South, the Republicans' 
political and economic power would be lost. So, when Lincoln 
vetoed the bill, his own Party bitterly turned against him. 

Running throughout these cross-currents of motives and spe- 
cial interests were two groups which found it increasingly to their 
advantage to have Lincoln out of the way. One group consisted of 
the financiers, Northern industrialists, and radical Republicans, all 
of whom wanted to legally plunder the South at the end of the war. 
The politicians within that group also looked forward to further 
consolidating their power and literally establishing a military 


dictatorship. 1 The other group was smaller in size but equally 
dangerous. It consisted of hothead Confederate sympathizers — 
from both South and North— who sought revenge. Later events 
revealed that both of these groups had been involved in a conspira- 
torial liaison with an organization called the Knights of the Golden 


The Order of the Knights of the Golden Circle was a secret 

organization dedicated to revolution and conquest. Two of its 

better known members were Jesse James and John Wilkes Booth, ft 

was organized by George W.L. Bickley who established its first 

"castle" in Cincinnati in 1854, drawing membership primarily from 

Masonic lodges. It had close ties with a secret society in France 

called The Seasons, which itself was a branch of the Illuminati. 

After the beginning of the war, Bickley was made head of the 

Confederacy's secret service, and his organization quickly spread 

throughout the border and Southern states as well. 

In the North, the conspirators were seeking "to A seize political 

power and overthrow the Lincoln government." In fact, the 

Northern anti-draft riots mentioned previously were largely the 

result of the planning and leadership of this group. In the South 

"they tried to promote the extension of slavery by the conquest of 

Mexico." 5 In partnership with Maximilian, the Knights hoped to 

establish a Mexican- American empire which would be an effective 

counter force against the North. In fact, the very name of the 

organization is based on their goal of carving an empire out of 

North America with geographical boundaries forming a circle with 

the center in Cuba, and its circumference reaching northward to 

Pennsylvania, southward to Panama. 

1. For highly readable accounts of this movement, see Theodore Roscoe, The Web 
of Conspiracy: The Complete Story of the Men Who Murdered Abraham Lincoln (Engle- 
wood Cliffs, New Jersey: Prentice-Hall, 1959); also Claude G. Bowers, The Tragic 
Era: The Revolution after Lincoln, (New York: Houghton Mifflin, 1957). 

2. "No Civil War at All, Part Two," by Will A m Mcllhany, Journal of Individualist 

Studies, Fall, 1992, pp. 18-20. 

3. Horan, p. 15. 

4. Ibid., pp. 208-23. 

5. Ibid., p. 16. Regarding the annexation of Mexico, also see the Columbia Encyclo- 
pedia, Third Edition, p. 1143. 


In 1863 the group was reorganized as the Order of American 
Knights and, again the following year, as the Order of the Sons of 
Liberty. Its membership then was estimated at between 200,000 and 
300,000. After the war, it went further underground and remnants 
eventually emerged as the Ku Klux Klan. 


One of the persistent legends of this period is that John Wilkes 
Booth was not killed in Garrett's barn, as generally accepted, but 
was allowed to escape; that the corpse actually was that of an 
accomplice; and that the government, under the firm control of 
War Secretary Edwin M. Stanton, moved heaven and earth to cover 
up the facts. On the face of it, that is an absurd story. But, when the 
voluminous files of the War Department were finally declassified 
and put into the public domain in the mid 1930s, historians were 
shocked to discover that there are many facts in those files which 
lend credence to the legend. The first to probe these amazing 
records was Otto Eisenschiml whose Why Was Lincoln Murdered? 
was published by Little, Brown and Company in 1937. The best and 
most readable compilation of the facts, however, was written 
twenty years later by Theodore Roscoe. In the preface to this work, 
he states the startling conclusions which emerge from those long- 
hidden files: 

Of the immense 19th century literature that exists on Lincoln's 
assassination, much of the writing treats the tragedy at Ford's theater 

as though it were Grand Opera Only a few have seen the crime as a 

murder case: Lincoln dying by crass felony, Booth a stalking gunman 
leading a gang of primed henchmen, the murder plot containing 
ingredients as base as the profit motive. Seventy years after the crime, 
writers were garbling it with a dignity it did not deserve: Lincoln, the 
stereotyped martyr; Booth, the stereotyped villain; the assassination 
avenged by classic justice; conspiracy strangled; Virtue (in the robes of 
Government) emerging triumphant, and Lincoln "belonging to the 

But the facts of the case are neither so satisfying nor so gratifying. 
For the facts indicate that the criminals responsible for Lincoln's death 
got away with murder. 1 

Izola Forrester was the granddaughter of John Wilkes Booth. In 
her book entitled This One Mad Act, she tells of discovering the 

1. Roscoe, p. vii. 


secret records of the Knights of the Golden Circle which had been 
carefully wrapped and placed in a government vault many decades 
ago and designated as classified documents by Secretary Stanton. 
Since the assassination of Lincoln, no one had ever been allowed to 
examine that package. Because of her lineage to Booth and because 
of her credentials as a professional writer, she was eventually 
permitted to become the first person in all those years to examine 
its contents. Forrester recounts the experience: 

It was five years before I was able to examine the contents of the 
mysterious old package hidden away in the safe of the room which 
contained the relics and exhibits used in the Conspiracy Trial.... ] 
would never have seen them, had I not knelt on the floor of the cell five 
years ago and seen into the back of the old safe where the package lay. 
It is all part of the odd mystery thrown about the case by the officials 
of the war period — the concealment of these documents and articles, 
and the hiding away of the two flakes of bone with the bullet and 
pistol. What mind ever grouped together such apparently 
incongruous and macabre exhibits?... 

Here at last was a link with my grandfather. I knew that he had 
been a member of the secret order founded by Bickley, the Knights of 
the Golden Circle. I have an old photograph of him taken in a group of 
the brotherhood, in full uniform, one that Harry's daughter had 
discovered for me in our grandmother's Bible. I knew that the 
newspapers, directly following the assassination, had denounced the 
order as having instigated the killing of Lincoln, and had proclaimed 
Booth to have been its member and tool. And I was reminded again of 
those words I had heard from my grandmother's lips, that her 
husband had been "the tool of other men." 1 

An interesting comment. One is compelled to wonder: The tool 
of what other men? Was Forrester's grandmother referring to the 
leaders of the Knights of the Golden Circle? To agents of European 
financiers? Or was it to conspirators within Lincoln's own Party? 
We shall probably never know with certainty the extent to which 
any of these groups may have been involved in Lincoln's assassina- 
tion, but we do know that there were powerful forces within the 
federal government, centered around Secretary of War Stanton, 
which actively concealed evidence and hastily terminated the 
investigation. Someone was protected. 

1. Izola Forrester,